<PAGE>
Registration No. 811-2120
Registration No. 2-38414
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_|
Post-Effective Amendment No. 58 |X|
------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
Post-Effective Amendment No. 58 |X|
------
(Check appropriate box or boxes)
SECURITY INCOME FUND
(Exact Name of Registrant as Specified in Charter)
700 HARRISON STREET, TOPEKA, KANSAS 66636-0001
(Address of Principal Executive Offices/Zip Code)
Registrant's Telephone Number, including area code:
(913) 295-3127
Copies To:
John D. Cleland, President Amy J. Lee, Secretary
Security Income Fund Security Income Fund
700 Harrison Street 700 Harrison Street
Topeka, KS 66636-0001 Topeka, KS 66636-0001
(Name and address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
|_| immediately upon filing pursuant to paragraph (b)
|X| on April 30, 1997, pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(1)
|_| on April 30, 1997, pursuant to paragraph (a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2)
|_| on April 30, 1997, pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
--------------------
Pursuant to regulation 270.24f-2 under the Investment Company Act of 1940, the
Registrant has elected to register an indefinite number of its shares of Common
Stock. The Registrant filed the Notice required by 24f-2 on February 25, 1997.
<PAGE>
SECURITY INCOME FUND
FORM N-1A
CROSS REFERENCE SHEET
Form N-1A
ITEM NUMBER CAPTION
PART A PROSPECTUS
1. Cover Page
2. Not Applicable
2a. Transaction and Operating Expense Table
3. Financial Highlights; Performance
4. Investment Objectives and Policies of the Funds
5. Management of the Funds; Portfolio Management, Trading
Practices and Brokerage
6. General Information; Organization; Stockholder Inquiries;
Dividends and Taxes
7. How to Purchase Shares; Alternative Purchase Options; Class A
Shares; Security Income Fund's Class A Distribution Plan; Class
B Shares; Class B Distribution Plan; Calculation and Waiver of
Contingent Deferred Sales Charges; Arrangements with
Broker/Dealers and Others; Determination of Net Asset Value;
Purchases at Net Asset Value; Stockholder Services;
Accumulation Plan; Exchange Privilege; Exchange by Telephone;
Retirement Plans; Appendix C
8. How to Redeem Shares; Telephone Redemptions; Systematic
Withdrawal Program
9. Not Applicable
PART B STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page
11. Table of Contents
12. Not Applicable
13. Investment Objectives and Policies of the Funds; Security
Income Fund's Fundamental Policies; Investment Policy
Limitations
14. Officers and Directors
15. Remuneration of Directors and Others
16. Investment Management; Portfolio Management; Distributor;
Custodian, Transfer Agent and Dividend-Paying Agent
17. Allocation of Portfolio Brokerage
18. Organization
<PAGE>
PART B (Continued)
STATEMENT OF ADDITIONAL INFORMATION
19. How to Purchase Shares; Alternative Purchase Options; Class A
Shares; Security Income Fund's Class A Distribution Plan; Class
B Shares; Class B Distribution Plan; Calculation and Waiver of
Contingent Deferred Sales Charge; Arrangements with
Broker/Dealers and Others; Determination of Net Asset Value;
How to Redeem Shares; Telephone Redemptions; How to Exchange
Shares; Purchases at Net Asset Value; Accumulation Plan;
Systematic Withdrawal Program; Exchange by Telephone;
Retirement Plans; Individual Retirement Accounts (IRAs); SIMPLE
IRAs; Pension and Profit Sharing Plans; 403(b) Retirement
Plans; Simplified Employee Pension Plans (SEPPs); Appendix A
20. Dividends and Taxes
21. Distributor
22. Performance Information
23. Financial Statements; Independent Auditors
<PAGE>
Security Funds
PROSPECTUS
May 1, 1997
* Security Income Fund
- Corporate Bond Series
- Limited Maturity Bond Series
- U.S. Government Series
- Global Aggressive Bond Series
- High Yield Series
* Security Tax-Exempt Fund
* Security Cash Fund
* Application
[SDI Logo]
<PAGE>
SECURITY FUNDS
PROSPECTUS
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SECURITY INCOME FUND
* CORPORATE BOND SERIES PROSPECTUS
* LIMITED MATURITY BOND SERIES MAY 1, 1997
* U.S. GOVERNMENT SERIES
* HIGH YIELD SERIES
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
MEMBERS OF THE SECURITY BENEFIT GROUP OF COMPANIES, 700 HARRISON, TOPEKA, KANSAS
66636-0001
The investment objective of the CORPORATE BOND SERIES ("Corporate Bond
Fund") is conservation of principal while generating interest income by
investing primarily in a diversified portfolio of investment grade corporate
debt securities. The investment objective of the LIMITED MATURITY BOND SERIES
("Limited Maturity Bond Fund") is to seek a high level of income consistent with
moderate price fluctuation by investing primarily in short-and intermediate-term
debt securities. The investment objective of the U.S. GOVERNMENT SERIES ("U.S.
Government Fund") is to provide a high level of interest income with security of
principal by investing primarily in securities which are guaranteed or issued by
the U.S. Government, its agencies or instrumentalities. The investment objective
of the HIGH YIELD SERIES ("High Yield Fund") is to seek high current income.
Capital appreciation is a secondary objective. The Fund seeks to achieve its
objective by investing primarily in a broad range of income producing
securities, including domestic and foreign high-yield, lower rated debt
securities. THE FUND INVESTS PRIMARILY (AND MAY INVEST UP TO 100% OF ITS ASSETS)
IN LOWER RATED BONDS, COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS,
INCLUDING DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS
SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING. SEE "INVESTMENT METHODS
AND RISK FACTORS" - "RISKS ASSOCIATED WITH LOWER RATED DEBT SECURITIES" ON PAGE
18.
The investment objective of SECURITY TAX-EXEMPT FUND ("Tax-Exempt Fund") is
to obtain as high a level of interest income exempt from federal income taxes as
is consistent with preservation of stockholders' capital by investing primarily
in debt securities which are exempt from federal income tax. Except at times
when the Fund is invested defensively, at least 80 percent of its total assets
will be invested in securities exempt from federal income taxes, including
alternative minimum tax.
The investment objective of SECURITY CASH FUND ("Cash Fund") is to earn as
high a level of current income as is consistent with preservation of capital and
liquidity through investments in money market instruments with maturities of not
longer than thirteen months. AN INVESTMENT IN CASH FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT CASH FUND
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth concisely the information that a prospective
investor should know about the Funds. It should be read and retained for future
reference. Certain additional information is contained in a Statement of
Additional Information about the Funds, dated May 1, 1997, which has been filed
with the Securities and Exchange Commission. The Statement of Additional
Information, as it may be supplemented from time to time, is incorporated by
reference in this Prospectus. It is available at no charge by writing Security
Distributors, Inc., 700 Harrison Street, Topeka, Kansas 66636-0001, or by
calling (913) 295-3127 or (800) 888-2461.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND INVOLVES RISK, INCLUDING LOSS OF PRINCIPAL, AND IS NOT
A DEPOSIT OR OBLIGATION OF, OR GUARANTEED BY ANY BANK. THE FUNDS ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY.
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<PAGE>
SECURITY FUNDS
CONTENTS
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Page
Transaction and Operating Expense Table..................................... 1
Financial Highlights........................................................ 2
Investment Objective and Policies of the Funds.............................. 4
Security Income Fund...................................................... 4
Corporate Bond Fund..................................................... 4
Limited Maturity Bond Fund.............................................. 5
U.S. Government Fund.................................................... 7
High Yield Fund......................................................... 7
Security Tax-Exempt Fund.................................................. 9
Security Cash Fund........................................................ 10
Investment Methods and Risk Factors......................................... 11
Management of the Funds..................................................... 19
Portfolio Management...................................................... 20
How to Purchase Shares...................................................... 20
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Tax-Exempt Funds.......................................................... 21
Alternative Purchase Options.............................................. 21
Class A Shares............................................................ 21
Security Income Fund's Class A Distribution Plan.......................... 22
Class B Shares............................................................ 22
Class B Distribution Plan................................................. 23
Calculation and Waiver of Contingent Deferred Sales Charges............... 23
Arrangements with Broker-Dealers and Others............................... 24
Cash Fund................................................................. 24
Purchases at Net Asset Value................................................ 25
Trading Practices and Brokerage............................................. 25
How to Redeem Shares........................................................ 26
Telephone Redemptions .................................................... 27
Dividends and Taxes......................................................... 27
Foreign Taxes............................................................. 28
Determination of Net Asset Value............................................ 29
Performance................................................................. 29
Stockholder Services........................................................ 30
Accumulation Plan......................................................... 30
Systematic Withdrawal Program............................................. 30
Exchange Privilege........................................................ 31
Exchange by Telephone..................................................... 31
Retirement Plans.......................................................... 31
General Information......................................................... 32
Organization.............................................................. 32
Stockholder Inquiries..................................................... 32
Appendix A ................................................................. 33
Appendix B ................................................................. 35
Appendix C ................................................................. 37
Security Cash Fund Application.............................................. 39
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<PAGE>
SECURITY FUNDS
PROSPECTUS
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TRANSACTION AND OPERATING EXPENSE TABLE
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<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CORPORATE BOND, LIMITED
MATURITY BOND, U.S. GOVERNMENT,
HIGH YIELD AND TAX-EXEMPT FUNDS
CLASS A CLASS B(1) CASH FUND
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price 4.75% None None
Maximum Sales Load Imposed on Reinvested Dividends None None None
Deferred Sales Load (as a percentage of original purchase price or redemption
proceeds, whichever is lower) None(2) 5% during the first year, None
decreasing to 0% in the
sixth and following years
</TABLE>
<TABLE>
<CAPTION>
CORPORATE BOND LIMITED U.S. HIGH YIELD TAX-EXEMPT CASH
FUND MATURITY GOVERNMENT FUND FUND FUND
BOND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
---------------------------------------------------------------------------------------
Management Fees (after fee waivers)(3) 0.50% 0.50% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.50% 0.50% 0.50%
12b-1 Fees4 0.25% 1.00% 0.25% 1.00% 0.25% 1.00% 0.25% 1.00% None 1.00% None
Other Expenses (after expense 0.26% 0.35% 0.65% 0.88% 0.40% 0.86% 1.29% 1.26% 0.28% 0.51% 0.51%
reimbursements)(5) ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Fund Operating Expenses (after fee 1.01% 1.85% 0.90% 1.88% 0.65% 1.86% 1.54% 2.26% 0.78% 2.01% 1.01%
waivers and expense reimbursements)(6) ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
EXAMPLE
You would pay the following expenses 1 Year $ 57 $ 69 $ 56 $ 69 $ 54 $ 69 $ 62 $ 73 $ 55 $ 70 $ 10
on a $1,000 investment, assuming 3 Years 78 88 75 89 67 88 94 101 71 93 32
(1) 5 percent annual return and 5 Years 101 120 95 122 82 121 89 128 55
(2) redemption at the end of each 10 Years 165 217 153 220 125 218 140 234 122
time period
EXAMPLE
You would pay the following expenses 1 Year $ 57 $ 19 $ 56 $ 19 $ 54 $ 19 $ 62 $ 23 $ 55 $ 20 $ 10
on a $1,000 investment, assuming 3 Years 78 58 75 59 67 58 94 71 71 63 32
(1) 5 percent annual return and 5 Years 101 100 95 102 82 101 89 108 55
(2) no redemption 10 Years 165 217 153 220 125 218 140 234 122
</TABLE>
1 Class B shares convert tax-free to Class A shares automatically after eight
years.
2 Purchases of Class A shares in amounts of $1,000,000 or more are not
subject to an initial sales load; however, a contingent deferred sales charge
of 1% is imposed in the event of redemption within one year of purchase. See
"Class A Shares" on page 21.
3 During the fiscal year ended December 31, 1996, the Investment Manager
waived the investment advisory fees of the Limited Maturity Bond, U.S.
Government and High Yield Funds and, during the fiscal year ending December
31, 1997 will waive the investment advisory fees of Limited Maturity Bond,
U.S. Government and High Yield Funds; absent such fee waivers, "Management
Fees" would have been as follows: .5% for each of the Limited Maturity Bond
and U.S. Government Funds and .6% for the High Yield Fund.
4 Long-term holders of shares that are subject to an asset-based sales charge
may pay more than the equivalent of the maximum front-end sales charge
otherwise permitted by NASD Rules.
5 During the fiscal year ended December 31, 1996, the Investment Manager
reimbursed certain expenses of the Funds. Absent such reimbursement, "Other
Expenses" would have been as follows: .53% for Class B shares of Corporate
Bond Fund; 1.06% for Class B shares of Limited Maturity Bond Fund; 1.73% for
Class B shares of U.S. Government Fund; and .68% for Class B shares of
Tax-Exempt Fund.
6 During the fiscal year ended December 31, 1996, the Investment Manager
waived and/or reimbursed certain expenses of the Funds and, during the fiscal
year ending December 31, 1997 will waive the investment advisory fees of
Limited Maturity Bond, U.S. Government and High Yield Funds. Absent such
reimbursement and waiver, "Total Fund Operating Expenses" would have been as
follows: 2.05% for Class B shares of Corporate Bond Fund; 1.40% for Class A
shares and 2.60% for Class B shares of Limited Maturity Bond Fund; 1.17% for
Class A shares and 3.26% for Class B shares of U.S. Government Fund; 2.11%
for Class A shares and 2.83% for Class B shares of High Yield Fund; and 2.19%
for Class B shares of Tax-Exempt Fund.
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AS ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE
ASSUMED FIVE PERCENT ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED
A REPRESENTATION OF PAST OR FUTURE ANNUAL RETURN. THE ACTUAL RETURN MAY BE
GREATER OR LESSER THAN THE ASSUMED AMOUNT.
The purpose of the foregoing fee table is to assist the investor in
understanding the various costs and expenses that an investor in Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield, Tax-Exempt or Cash Funds
will bear directly or indirectly. For a more detailed discussion of the Funds'
fees and expenses, see the discussion under "Management of the Funds," page 19.
Information on the Funds' 12b-1 Plans may be found under the headings "Security
Income Fund's Class A Distribution Plan" on page 22 and "Class B Distribution
Plan" on page 23. See "How to Purchase Shares," page 20, for more information
concerning the sales load. Also, see Appendix C for a discussion of "Rights of
Accumulation" and "Statement of Intention," which options may serve to reduce
the front-end sales load on purchase of Class A Shares.
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1
<PAGE>
SECURITY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following financial highlights for each of the years in the period
ended December 31, 1996, have been audited by Ernst & Young LLP. Such
information for each of the five years in the period ended December 31, 1996,
should be read in conjunction with the financial statements of the Funds and the
report of Ernst & Young LLP, the Funds' independent auditors, appearing in the
December 31, 1996 Annual Report which is incorporated by reference in this
Prospectus. The Funds' Annual Report also contains additional information about
the performance of the Funds and may be obtained without charge by calling
Security Distributors, Inc. at 1-800-888-2461. The information for each of the
periods preceding and including the year ended December 31, 1991, is not covered
by the report of Ernst & Young LLP.
<TABLE>
<CAPTION>
Net
gains Ratio
Net (losses) Divi- of Ratio
asset on sec- Total dends Net expenses of net
value urities from (from Distri- Net assets to income Port-
begin- Net (real- invest- net butions Return asset end of aver- to folio
Fiscal ning invest- ized & ment invest- (from of Total value Total period age average turn-
year of ment unreal- opera- ment capital capi- distri- end of return (thou- net net over
end period income ized) tions income) gains) tal butions period (a) sands) assets assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BOND FUND (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $ 8.32 $.79 $ (.48) $ .31 $(.85) $ --- $ --- $(.85) 7.78 4.0% $ 44,093 1.00% 9.73% 127%
1988 7.78 .77 (.292) .478 (.778) --- --- (.778) 7.48 6.5% 52,296 1.02% 10.04% 83%
1989 7.48 .74 (.031) .709 (.739) --- --- (.739) 7.45 9.9% 56,184 1.04% 9.83% 57%
1990 7.45 .69 (.232) .458 (.688) --- --- (.688) 7.22 6.6% 65,962 1.10% 9.42% 87%
1991 7.22 .65 .458 1.108 (.648) --- --- (.648) 7.68 16.1% 85,824 1.03% 8.75% 32%
1992 7.68 .61 .044 .654 (.614) --- --- (.614) 7.72 9.0% 104,492 1.01% 7.97% 61%
1993 7.72 .52 .521 1.041 (.527) (.424) --- (.951) 7.81 13.4% 118,433 1.02% 6.46% 157%
1994 7.81 .49 (1.127) (.637) (.493) --- --- (.493) 6.68 (8.3%) 90,593 1.01% 6.91% 204%
1995 6.68 .47 0.708 1.178 (.468) --- --- (.468) 7.39 18.2% 93,701 1.02% 6.62% 200%
(d)(g)
1996 7.39 .47 (.517) (.047) (.473) --- --- (.473) 6.87 (.5%) 73,360 1.01% 6.54% 292%
(d)(g)
CORPORATE BOND FUND (CLASS B)
1993(b)$ 8.59 $.11 $ (.324) $ (.214) $ (.112) $(.424) $--- $(.536) 7.84 (2.5%) $ 1,022 1.88% 5.16% 164%
1994(c) 7.84 .43 (1.129) (.699) (.431) --- --- (.431) 6.71 (9.0%) 3,878 1.85% 6.08% 204%
1995(c) 6.71 .40 .725 1.125 (.405) --- --- (.405) 7.43 17.3% 5,743 1.85% 5.80% 200%
(d)(g)
1996(c) 7.43 .40 (.517) (.117) (.413) --- --- (.413) 6.90 (1.4%) 7,303 1.85% 5.70% 292%
(d)(g)
LIMITED MATURITY BOND FUND (CLASS A)
1995(c)$10.00 $.62 $ .652 $1.272 $(.612) $--- $--- $(.612) $10.66 13.0% $ 3,322 .84% 5.97% 4%
(d)(e)
1996(c) 10.66 .72 (.507) .213 (.720) --- (.013) (.733) 10.14 2.1% 4,938 .90% 6.97% 105%
(d)(g)
LIMITED MATURITY BOND FUND (CLASS B)
1995(c)$10.00 $.53 $ .664 $1.194 $(.524) $--- $--- $(.524) $10.67 12.2% 752 $1.71% 5.12% 4%
(d)(e)
1996(c) 10.67 .63 (.524) .106 (.624) --- (.012) (.636) 10.14 1.1% 761 1.88% 5.99% 105%
(d)(g)
U.S. GOVERNMENT FUND (CLASS A)
1987(c)$ 5.29 $.45 $ (.265) $ .185 $(.475) $--- $--- $(.475) 5.00 3.7% $ 4,467 1.00% 8.78% 166%
1988(c) 5.00 .48 (.18) .30 (.49) --- --- (.49) 4.81 6.2% 4,229 1.00% 9.83% 107%
1989(c) 4.81 .46 .078 .538 (.458) --- --- (.458) 4.89 11.8% 4,551 1.11% 9.46% 52%
1990(c) 4.89 .42 .032 .452 (.412) --- --- (.412) 4.93 9.8% 6,017 1.11% 8.60% 22%
1991(c) 4.93 .40 .248 .648 (.404) --- (.004) (.408) 5.17 13.8% 7,319 1.11% 7.94% 41%
1992(c) 5.17 .37 (.126) .244 (.366) --- (.008) (.374) 5.04 5.0% 9,364 1.11% 7.22% 157%
1993(c) 5.04 .31 .273 .583 (.310) (.344) --- (.654) 4.97 10.9% 10,098 1.10% 5.90% 153%
1994(c) 4.97 .30 (.621) (.321) (.299) --- --- (.299) 4.35 (6.5%) 8,309 1.10% 6.47% 220%
1995(c) 4.35 .30 .620 .920 (.30) --- --- (.30) 4.97 21.9% 10,080 1.11% 6.41% 81%
(d)(g)
1996(c) 4.97 .31 (.256) .054 (.314) --- --- (.314) 4.71 1.3% 8,036 .65% 6.44% 75%
(d)(g)
U.S. GOVERNMENT FUND (CLASS B)
1993(b)$ 5.51 $.04 $ (.193) $ (.153) $(.043) $(.344) $--- $(.387) 4.97 (1.4%) 140 $ 1.61% 5.54% 114%
(c)
1994(c) 4.97 .26 (.624) (.364) (.256) --- --- (.256) 4.35 (7.4%) 321 1.85% 5.76% 220%
1995(c) 4.35 .26 .625 .885 (.265) --- --- (.265) 4.97 20.9% 582 1.87% 5.69% 81%
(d)(g)
1996(c) 4.97 .25 (.254) (.004) (.256) --- --- (.256) 4.71 .02% 661 1.86% 5.23% 75%
(d)(g)
HIGH YIELD FUND (CLASS A)
1996(c)$15.00 $.45 $ .32 $ .77 $(.45) $--- $--- $(.45) $15.32 5.2% $ 2,780 1.54% 7.47% 168%
(d)(h)
HIGH YIELD FUND (CLASS B)
1996(c)$15.00 $.41 $ .32 $ .73 $(.41) $--- $--- $(.41) $15.32 4.9% $ 2,719 2.26% 6.74% 168%
(d)(h)
TAX-EXEMPT FUND (CLASS A)
1987(c)$10.00 $.82 $ .78 $ $1.60 $(.82) $(.02) $--- $(.84) $10.76 15.5% $ 16,297 1.00% 7.79% 23%
1988(c) 10.76 .76 (.656) .104 (.774) (.12) --- (.894) 9.97 1.3% 17,814 1.00% 7.60% 83%
1989 9.97 .73 (.257) .473 (.723) --- --- (.723) 9.72 4.9% 19,898 .98% 7.47% 33%
1989(f) 9.72 .61 (.106) .504 (.624) --- --- (.624) 9.60 4.1% 20,426 .97%* 6.97%* 75%*
1990 9.60 .64 (.072) .568 (.638) --- --- (.638) 9.53 6.2% 20,566 .96% 6.75% 74%
1991 9.53 .63 .446 1.076 (.636) --- --- (.636) 9.97 11.7% 23,218 .89% 6.55% 38%
1992 9.97 .61 .092 .702 (.612) --- --- (.612) 10.06 7.3% 28,608 .84% 6.07% 91%
See accompanying notes.
</TABLE>
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2
<PAGE>
SECURITY FUNDS
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
gains Ratio
Net (losses) Divi- of Ratio
asset on sec- Total dends Net expenses of net
value urities from (from Distri- Net assets to income Port-
begin- Net (real- invest- net butions Return asset end of aver- to folio
Fiscal ning invest- ized & ment invest- (from of Total value Total period age average turn-
year of ment unreal- opera- ment capital capi- distri- end of return (thou- net net over
end period income ized) tions income) gains) tal butions period (a) sands) assets assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT FUND (CLASS A) (CONTINUED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $10.06 $.51 $ .702 $1.212 $(.514) $(.388) $--- $(.902) $10.37 11.6% $32,115 .82% 4.92% 118%
1994 10.37 .47 (1.317) (.847) (.473) --- --- (.473) 9.05 (8.3%) 24,092 .82% 4.74% 88%
1995(c) 9.05 .48 .891 1.371 (.481) --- --- (.481) 9.94 15.5% 25,026 .86% 5.02% 103%
(d)(g)
1996(c) 9.94 .45 (.215) .235 (.455) --- --- (.455) 9.72 2.5% 23,304 .78% 4.67% 54%
(d)(g)
TAX-EXEMPT FUND (CLASS B)
1993(b) $10.88 $.10 $ (.128) $(.028) $(.094) $(.388) $--- $(.482) $10.37 (.2%) 106 2.89% 2.71% 90%
1994(c) 10.37 .35 (1.321) (.971) (.349) --- --- (.349) 9.05 (9.5%) 760 2.00% 3.50% 88%
1995(c) 9.05 .37 .902 1.272 (.372) --- --- (.372) 9.95 14.3% 1,190 2.00% 3.90% 103%
(d)(g)
1996(c) 9.95 .33 (.215) .115 (.335) --- --- (.335) 9.73 1.2% 1,510 2.01% 3.44% 54%
(d)(g)
CASH FUND
1987(c) $ 1.00 $.057 $--- $ .057 $(.057) $--- $--- $(.057) $ 1.00 5.8% $37,773 1.00% 5.68% ---
1988(c) 1.00 .061 --- .061 (.061) --- --- (.061) 1.00 6.3% 43,038 1.00% 6.10% ---
1989(c) 1.00 .070 --- .070 (.070) --- --- (.070) 1.00 7.3% 46,625 1.00% 7.09% ---
1989(c) 1.00 .069 --- .069 (.069) --- --- (.069) 1.00 7.1% 54,388 1.00%* 8.26%* ---
(f)
1990(c) 1.00 .073 --- .073 (.073) --- --- (.073) 1.00 7.6% 65,018 1.00% 7.31% ---
1991 1.00 .051 --- .051 (.051) --- --- (.051) 1.00 5.2% 48,843 .96% 5.21% ---
1992(c) 1.00 .028 --- .028 (.028) --- --- (.028) 1.00 2.8% 56,694 1.00% 2.75% ---
1993(c) 1.00 .023 --- .023 (.023) --- --- (.023) 1.00 2.4% 71,870 1.00% 2.28% ---
1994 1.00 .033 --- .033 (.033) --- --- (.033) 1.00 3.4% 58,102 .96% 3.24% ---
1995(c) 1.00 .049 --- .049 (.049) --- --- (.049) 1.00 5.0% 38,158 1.00% 5.00% ---
(d)
1996(c) 1.00 .045 --- .045 (.045) --- --- (.045) 1.00 4.6% 45,331 1.01% 4.47% ---
(d)(g)
</TABLE>
(a) Total return information does not reflect deduction of any sales charge
imposed at the time of purchase for Class A shares or upon redemption for
Class B shares.
(b) Class "B" shares were initially offered on October 19, 1993. Percentage
amounts for the period, except total return, have been annualized.
(c) Fund expenses were reduced by the Investment Manager during the period, and
expense ratios absent such reimbursement would have been as follows:
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate Bond Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Class B N/A N/A N/A N/A N/A N/A N/A 2.00% 2.19% 2.05%
U.S. Government Class A 1.80% 1.31% 1.37% 1.34% 1.24% 1.20% 1.20% 1.20% 1.22% 1.17%
Class B N/A N/A N/A N/A N/A N/A 1.75% 2.91% 3.70% 3.26%
Limited Maturity Bond Class A N/A N/A N/A N/A N/A N/A N/A N/A 1.04% 1.40%
Class B N/A N/A N/A N/A N/A N/A N/A N/A 2.12% 2.60%
High Yield Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A 2.11%
Class B N/A N/A N/A N/A N/A N/A N/A N/A N/A 2.83%
Tax-Exempt Class A 1.16% 1.03% N/A N/A N/A N/A N/A N/A 0.86% .78%
Class B N/A N/A N/A N/A N/A N/A N/A 2.32% 2.45% 2.19%
Cash 1.07% 1.04% 1.13%** 1.01% N/A 1.03% 1.03% N/A 1.04% 1.01%
1.03%***
</TABLE>
(d) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(e) Security Limited Maturity Bond Fund was initially capitalized on January
17, 1995, with a net asset value of $10 per share. Percentage amounts for
the period have been annualized, except for total return.
(f) Effective December 31, 1989, the fiscal year ends of Tax-Exempt and Cash
Funds were changed from January 31 and February 28, respectively, to
December 31. The information presented in the table above for the fiscal
year ended December 31 represents 11 months of performance for Tax-Exempt
Fund and 10 months of performance for Cash Fund. The data for years 1985
through 1989, are for the fiscal year ended January 31 for Tax-Exempt Fund
and for the fiscal year ended February 28 for Cash Fund.
(g) Expense ratios were calculated without the reduction for custodian fees
earnings credits. Expense ratios with such reductions would have been as
follows:
1995 1996
Corporate Bond Class A 1.02% 1.01%
Class B 1.85% 1.85%
U.S. Government Class A 1.10% 0.64%
Class B 1.85% 1.85%
Limited Maturity Bond Class A 0.81% 0.87%
Class B 1.65% 1.85%
Tax-Exempt Class A 0.85% 0.77%
Class B 2.00% 2.00%
Cash 1.00% 1.00%
(h) Security High Yield Fund was initially capitalized on August 5, 1996 with a
net asset value of $15.00 per share. Percentage amounts for the period have
been annualized, except for total return.
*Percentage amounts for the period, except total return, have been
annualized.
**This information represents the expense ratio absent reimbursements for the
period February 1, 1989 through December 31, 1989.
***This information represents the expense ratio absent reimbursements for the
fiscal year ended February 28, 1989.
- --------------------------------------------------------------------------------
3
<PAGE>
SECURITY FUNDS
PROSPECTUS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND
POLICIES OF THE FUNDS
Security Income, Tax-Exempt and Cash Funds are diversified open-end
management investment companies, which were organized as Kansas corporations on
September 9, 1970, July 14, 1981, and March 21, 1980, respectively. Each of the
Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government Fund and High
Yield Fund, series of Security Income Fund, and Security Tax-Exempt Fund and
Cash Fund (collectively, "the Funds") has its own investment objective and
policies which are described below. There, of course, can be no assurance that
such investment objectives will be achieved. While there is no present intention
to do so, the investment objective and policies of each Fund may be changed by
the Board of Directors of the Funds without the approval of stockholders.
However, stockholders will be given 30 days written notice of any such change.
If a change in investment objective is made, stockholders should consider
whether the Fund remains an appropriate investment in light of their then
current financial position and needs.
Each of the Funds is also subject to certain investment policy limitations,
which may not be changed without stockholder approval. Among these limitations,
some of the more important ones are that each Fund will not invest more than 5
percent of the value of its assets in any one issuer other than the U.S.
Government or its instrumentalities (for Cash and High Yield Funds, this
limitation applies only with respect to 75 percent of the value of its total
assets), purchase more than 10 percent of the outstanding voting securities of
any one issuer or invest 25 percent or more of its total assets in any one
industry. The full text of the investment policy limitations of each Fund is set
forth in the Funds' Statement of Additional Information.
Each of the Funds may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. See "Investment Methods
and Risk Factors" for a discussion of borrowing. Pending investment in
securities or to meet potential redemptions, each of the Funds may invest in
certificates of deposit, bank demand accounts, repurchase agreements and high
quality money market instruments.
SECURITY INCOME FUND
Security Income Fund ("Income Fund") is a series investment company, with
each Series representing a different investment objective and having its own
identified assets and net asset values. The investment objectives of Corporate
Bond, Limited Maturity Bond, U.S. Government and High Yield Fund are each
described below.
CORPORATE BOND FUND
The investment objective of Corporate Bond Fund is to preserve capital
while generating interest income. In pursuing its investment objective, the Fund
will invest in a broad range of debt securities, including (i) securities issued
by U.S. and Canadian corporations; (ii) securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars; (v)
higher yielding, high risk debt securities (commonly referred to as "junk
bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign bank
("Yankee CDs"); and (vii) investment grade mortgage backed securities ("MBSs").
Under normal circumstances, at least 65 percent of the Fund's total assets will
be invested in corporate debt securities which at the time of issuance have a
maturity greater than one year.
Corporate Bond Fund will invest primarily in corporate debt securities
rated Baa or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or
higher by Standard & Poor's Corporation ("S&P") at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. See
Appendix A to this Prospectus for a description of corporate bond ratings.
Included in such securities may be convertible bonds or bonds with warrants
attached which are rated at least Baa or BBB at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. A
"convertible bond" is a bond, debenture or preferred share which may be
exchanged by the owner for common stock or another security, usually of the same
company, in accordance with the terms of the issue. A "warrant" confers upon its
holder the right to purchase an amount of securities at a particular time and
price. Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics. See "Investment Methods and Risk Factors" for a discussion of
the risks associated with such securities.
Corporate Bond Fund may invest up to 25 percent of its net assets in higher
yielding debt securities in the lower rating (higher risk) categories of the
recognized rating services (commonly referred to as "junk bonds"). Such
securities include securities rated Ba or lower by Moody's or BB or lower by S&P
and are regarded as predominantly
- --------------------------------------------------------------------------------
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus and in the Statement of Additional Information in connection with the
offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Funds, the Investment Manager, or the Distributor.
- --------------------------------------------------------------------------------
4
<PAGE>
SECURITY FUNDS
PROSPECTUS
- --------------------------------------------------------------------------------
speculative with respect to the ability of the issuer to meet principal and
interest payments. The Fund will not invest in junk bonds which are rated in
default at the time of purchase. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with investing in such securities.
The Fund may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars.
The Fund may invest in Yankee CDs which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
U.S. Yankee CDs are subject to somewhat different risks than are the obligations
of domestic banks. The Fund also may invest in debt securities issued by foreign
governments, their agencies and instrumentalities and foreign corporations,
provided that such securities are denominated in U.S. dollars. The Fund's
investment in foreign securities, including Canadian securities, will not exceed
25 percent of the Fund's net assets. See "Investment Methods and Risk Factors"
for a discussion of the risks associated with investing in foreign securities.
The Fund may invest in investment grade mortgage backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund may invest up to 10 percent of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) or "principal-only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs. The
Fund will hold less than 25 percent of its net assets in MBSs. For a discussion
of MBSs and the risks associated with such securities, see "Investment Methods
and Risk Factors."
The Fund may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
Corporate Bond Fund may purchase securities on a "when-issued" or "delayed
delivery" basis in excess of customary settlement periods for the types of
security involved. For a discussion of such securities, see "Investment Methods
and Risk Factors." It is anticipated that securities invested in by this Fund
will be held by the Fund on an average from one and a half to three years and
that the average weighted maturity of the Fund's portfolio will range from 5 to
15 years under normal circumstances.
LIMITED MATURITY BOND FUND
The investment objective of the Limited Maturity Bond Fund is to seek a
high level of income consistent with moderate price fluctuation by investing
primarily in short- and intermediate-term bonds. As used herein the term "short-
and intermediate-term bonds" is used to describe any debt security with a
maturity of 15 years or less. In pursuing its investment objective, the Fund
will invest in a broad range of debt securities, including (i) securities issued
by U.S. and Canadian corporations; (ii) securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by, the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars; (v)
higher yielding, high risk debt securities (commonly referred to as "junk
bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign bank
("Yankee CDs"); (vii) investment grade mortgage backed securities ("MBSs"); and
(viii) investment grade asset-backed securities. High yield debt securities,
Yankee CDs, MBSs and asset-backed securities are described in further detail
under "Investment Methods and Risk Factors." Under normal circumstances, the
Fund will invest at least 65 percent of the value of its total assets in short-
and intermediate-term bonds. It is anticipated that the dollar weighted average
maturity of the Fund's portfolio will range from 2 to 10 years. It will not
exceed 10 years.
Limited Maturity Bond Fund will invest primarily in debt securities rated
Baa or higher by Moody's or BBB or higher by S&P at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. See
Appendix A to this Prospectus for a description of corporate bond ratings.
Included in such securities may be convertible bonds or bonds with warrants
attached which are rated at least Baa or BBB at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. A
"convertible bond" is a bond, debenture or preferred share which may be
exchanged, by the owner, for common stock or another security, usually of the
same company, in accordance with the terms of the issue. A "warrant" confers
upon its holder the right to purchase an amount of securities at a particular
time and price. Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics as described under "Investment Methods and Risk Factors"--"Baa
or BBB Securities."
The Fund may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"); however, the Fund will not hold more than 25 percent of its
net assets in junk bonds. This includes securities rated Ba or lower by Moody's
or BB or lower by S&P, and such
- --------------------------------------------------------------------------------
5
<PAGE>
SECURITY FUNDS
PROSPECTUS
- --------------------------------------------------------------------------------
securities are regarded as predominantly speculative with respect to the ability
of the issuer to meet principal and interest payments. The Fund will not invest
in junk bonds which are rated in default at the time of purchase. See
"Investment Methods and Risk Factors" for a discussion of the risks associated
with investing in such securities.
For the year ended December 31, 1996, the dollar weighted average of Limited
Maturity Bond Fund's holdings (excluding equities) had the following credit
quality characteristics.
PERCENT OF
INVESTMENT NET ASSETS
U.S. Government and
Government Agency Securities....................... 0%
Cash and other Assets, Less Liabilities............... 5.6%
Rated Fixed Income Securities
AAA................................................ 29.8%
AA................................................. 3.7%
A.................................................. 32.3%
Baa/BBB............................................ 12.1%
Ba/BB.............................................. 11.2%
B.................................................. 5.3%
Caa/CCC............................................ 0%
Unrated Securities Comparable in Quality to
A.................................................. 0%
Baa/BBB............................................ 0%
Ba/BB.............................................. 0%
B.................................................. 0%
Caa/CCC............................................ 0%
---
100%
The foregoing table is intended solely to provide disclosure about Limited
Maturity Bond Fund's asset composition for the year ended December 31, 1996. The
asset composition after this may or may not be approximately the same as shown
above.
The Fund may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. currency.
The Fund may invest in Yankee CDs which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States. Yankee CDs are subject to somewhat different risks than are the
obligations of domestic banks. The Fund may also invest in debt securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars. The
Fund's investment in foreign securities, including Canadian securities, will not
exceed 25 percent of the Fund's net assets. For a discussion of the risks
associated with foreign securities, see "Investment Methods and Risk Factors."
The Fund may invest in U.S. Government securities. U.S. Government
securities include bills, certificates of indebtedness, notes and bonds issued
by the Treasury or by agencies or instrumentalities of the U.S. Government. For
a discussion of the varying levels of guarantee associated with particular types
of U.S. Government Securities, see "Investment Methods and Risk Factors" --
"U.S. Government Securities."
Limited Maturity Bond Fund may acquire certain securities that are
restricted as to disposition under the federal securities laws, provided that
such securities are eligible for resale to qualified institutional investors
pursuant to Rule 144A under the Securities Act of 1933, and subject to the
Fund's policy that not more than 15 percent of the Fund's net assets will be
invested in illiquid assets. See "Investment Methods and Risk Factors" for a
discussion of Rule 144A Securities.
The Fund may invest in investment grade mortgage backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund may invest up to 10 percent of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
and "interest-only" (IO) and "principal-only" (PO) bonds, the market values of
which will generally be more volatile than the market values of most MBSs. The
Fund will hold less than 25 percent of its net assets in MBSs, including CMOs
and mortgage pass-through securities. For a discussion of MBSs and the risks
associated with such securities, see "Investment Methods and Risk Factors."
The Fund may also invest in investment grade "asset-backed securities."
These include secured debt instruments backed by automobile loans, credit card
loans, home equity loans, manufactured housing loans and other types of secured
loans providing the source of both principal and interest. Asset-backed
securities are subject to risks similar to those discussed with respect to MBSs.
See "Investment Methods and Risk Factors."
The Fund may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
Limited Maturity Bond Fund may purchase securities on a "when-issued" or
"delayed delivery" basis in excess of customary settlement periods for the type
of security involved. See "Investment Methods and Risk Factors."
From time to time, Limited Maturity Bond Fund may invest part or all of its
assets in commercial notes or money market instruments.
- --------------------------------------------------------------------------------
6
<PAGE>
SECURITY FUNDS
PROSPECTUS
- --------------------------------------------------------------------------------
U.S. GOVERNMENT FUND
The investment objective of the U.S. Government Fund is to provide a high
level of interest income with security of principal by investing primarily in
U.S. Government securities. U.S. Government securities include bills,
certificates of indebtedness, notes and bonds issued by the Treasury or by
agencies or instrumentalities of the U.S. Government. Under normal
circumstances, the Fund will invest at least 80 percent of the value of its
total assets in U.S. Government securities. For a discussion of the varying
levels of guarantee associated with particular types of U.S. Government
Securities, see "Investment Methods and Risk Practices" --"U.S. Government
Securities."
From time to time the portfolio of the U.S. Government Fund may consist
primarily of Government National Mortgage Association ("GNMA") certificates, or
"Ginnie Maes," which are mortgage-backed securities representing part ownership
of a pool of mortgage loans on which timely payment of interest and principal is
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. These loans, issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations, are either insured by the Federal
Housing Administration or guaranteed by the Veterans' Administration. A "pool"
or group of such mortgages is assembled and, after being approved by GNMA, is
offered to investors through securities dealers. Once approved by GNMA, the
timely payment of interest and principal on each mortgage is guaranteed by GNMA
and backed by the full faith and credit of the U.S. Government. Ginnie Mae
certificates differ from bonds in that principal is paid back monthly by the
borrower over the term of the loan rather than returned in a lump sum at
maturity. Ginnie Mae certificates are called "pass through" securities because
both interest and principal payments (including prepayments) are passed through
to the holder of the certificate. Upon receipt, principal payments generally
will be used to purchase additional Ginnie Mae certificates or other U.S.
Government securities. Although the Fund invests in securities guaranteed by
GNMA and backed by the U.S. Government, neither the value of the Fund's
portfolio nor the value or yield of its shares is so guaranteed. The Fund may,
for defensive purposes, temporarily invest part or all of its assets in money
market instruments, including deposits and bankers' acceptances in depository
institutions insured by the FDIC, and short-term U.S. Government and agency
securities.
The potential for appreciation in GNMAs, which might otherwise be expected
to occur as a result of a decline in interest rates, may be limited or negated
by increased principal prepayments of the underlying mortgages. Prepayments of
GNMA certificates occur with increasing frequency when mortgage rates decline
because, among other reasons, mortgagors may be able to refinance their
outstanding mortgages at lower interest rates or prepay their existing
mortgages. Such prepayments would then be reinvested by the Fund at the lower
current interest rates.
While mortgages underlying GNMA certificates have a stated maturity of up
to 30 years, it has been the experience of the mortgage industry that the
average life of comparable mortgages, owing to prepayments, refinancings and
payments from foreclosures, is considerably less.
The Fund may invest in other mortgage backed securities (MBSs) as discussed
under "Investment Methods and Risk Factors" -- "Mortgage Backed Securities and
Collateralized Mortgage Obligations." MBSs include certain securities issued by
the United States government or one of its agencies or instrumentalities, such
as GNMAs, and securities issued by private issuers. The Fund may not invest more
than 20 percent of the value of its total assets in MBSs issued by private
issuers.
The Fund may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
The Fund will attempt to maximize the return on its portfolio by taking
advantage of market developments and yield disparities, which may include use of
the following strategies:
1. Shortening the average maturity of its portfolio in anticipation of a
rise in interest rates so as to minimize depreciation of principal;
2. Lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize appreciation of principal;
3. Selling one type of U.S. Government obligation and buying another when
disparities arise in the relative values of each; and
4. Changing from one U.S. Government obligation to an essentially similar
U.S. Government obligation when their respective yields are distorted
due to market factors.
These strategies may result in increases or decreases in the Fund's current
income available for distribution to Fund stockholders, and the Fund may hold
obligations which sell at moderate to substantial premiums or discounts from
face value.
HIGH YIELD FUND
The investment objective of the High Yield Fund is to seek high current
income. Capital appreciation is a secondary objective. Under normal
circumstances, the Fund will seek its investment objective by investing
primarily in a broad range of income producing securities, including (i) higher
yielding, higher risk, debt securities (commonly
- --------------------------------------------------------------------------------
7
<PAGE>
SECURITY FUNDS
PROSPECTUS
- --------------------------------------------------------------------------------
referred to as "junk bonds"); (ii) preferred stock; (iii) securities issued by
foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars;
(iv) mortgage-backed securities ("MBSs"); (v) asset-backed securities; (vi)
securities issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities, including Treasury bills, certificates of indebtedness, notes
and bonds; (vii) securities issued or guaranteed by, the Dominion of Canada or
provinces thereof; and (viii) zero coupon securities. The Fund may also invest
up to 35 percent of its assets in common stocks (which may include ADRs),
warrants and rights. Under normal circumstances, at least 65 percent of the
Fund's total assets will be invested in high-yielding, high risk debt
securities.
High Yield Fund may invest up to 100 percent of its assets in debt
securities that, at the time of purchase, are rated below investment grade
("high yield securities" or "junk bonds"), which involve a high degree of risk
and are predominantly speculative. A description of debt ratings is included as
Appendix A to this Prospectus. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with investing in junk bonds. Included in the
debt securities which the High Yield Fund may purchase are convertible bonds, or
bonds with warrants attached. A "convertible bond" is a bond, debenture, or
preferred share which may be exchanged by the owner for common stock or another
security, usually of the same company, in accordance with the terms of the
issue. A "warrant" confers upon the holder the right to purchase an amount of
securities at a particular time and price. See "Investment Methods and Risk
Factors" for a discussion of the risks associated with such securities.
For the period August 5, 1996 (date of inception) to December 31, 1996, the
dollar weighted average of High Yield Fund's holdings (excluding equities) had
the following credit quality characteristics.
PERCENT OF
INVESTMENT NET ASSETS
U.S. Government Securities............................ 0%
Cash and other Assets, Less Liabilities............... 11.4%
Rated Fixed Income Securities
Ba/BB.............................................. 38.2%
B.................................................. 49.4%
D.................................................. 1.0%
Unrated Securities Comparable in Quality to
A.................................................. 0%
Baa/BBB............................................ 0%
Ba/BB.............................................. 0%
B.................................................. 0%
Caa/CCC............................................ 0%
---
100.0%
The foregoing table is intended solely to provide disclosure about High Yield
Fund's asset composition for the period August 5, 1996 (date of inception) to
December 31, 1996. The asset composition after this may or may not be
approximately the same as shown above.
The Fund may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars. The
Fund may also invest in debt securities issued by foreign governments (including
Brady Bonds), their agencies and instrumentalities and foreign corporations
(including those in emerging markets), provided such securities are denominated
in U.S. dollars. The Fund's investment in foreign securities, excluding Canadian
securities, will not exceed 25 percent of the Fund's net assets. See "Investment
Method and Risk Factors" for a discussion of the risks associated with investing
in foreign securities, Brady Bonds and emerging markets.
The Fund may invest in MBSs, including mortgage pass-through securities and
collateralized mortgage obligations (CMO's). The Fund may invest in securities
known as "inverse floating obligations," "residual interest bonds," or "interest
only" (IO) or "principal only" (PO) bonds, the market values of which generally
will be more volatile that the market values of most MBSs. This is due to the
fact that such instruments are more sensitive to interest rate changes and to
the rate of principal prepayments than are most other MBSs. The Fund will hold
less than 25 percent of its net assets in MBSs. For a discussion of MBSs and the
risks associated with such securities, see "Investment Methods and Risk
Factors."
The Fund may also invest in asset-backed securities. These include secured
debt instruments backed by automobile loans, credit card loans, home equity
loans, manufactured housing loans and other types of secured loans providing the
source of both principal and interest payments. Asset-backed securities are
subject to risks similar to those discussed with respect to MBSs. See
"Investment Methods and Risk Factors."
The Fund may invest in U.S. Government securities. U.S. Government
securities include bills, certificates of indebtedness, notes and bonds issued
by the Treasury or by agencies or instrumentalities of the U.S. Government. For
a discussion of the varying levels of guarantee associated with particular types
of U.S. Government Securities, see "Investment Methods and Risk Factors" - "U.S.
Government Securities."
The Fund may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment
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SECURITY FUNDS
PROSPECTUS
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Methods and Risk Factors" for a discussion of zero coupon securities.
The High Yield Fund may acquire certain securities that are restricted as
to disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Fund's policy that not more than 10
percent of the Fund's net assets will be invested in illiquid assets. See
"Investment Methods and Risk Factors" for a discussion of restricted securities.
The High Yield Fund may purchase securities on "when issued" or "delayed
delivery" basis in excess of customary settlement periods for the type of
security involved. The Fund may also purchase or sell securities on a "forward
commitment" basis and may enter into "repurchase agreements," "reverse
repurchase agreements" and "roll transactions." The Fund may lend securities to
broker-dealers, other institutions or other persons to earn additional income.
The value of loaned securities may not exceed 33 1/3 percent of the Fund's total
assets. In addition, the Fund may purchase loans, loan participations and other
types of direct indebtedness. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with these investment practices.
The Fund may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or as an efficient means of
adjusting its exposure to the bond market. The Fund will not use futures
contracts for leveraging purposes. The Fund will limit its use of futures
contracts so that initial margin deposits or premiums on such contracts used for
non-hedging purposes will not equal more than 5 percent of the Funds net asset
value. The Fund may purchase call and put options and write such options on a
"covered" basis. The Fund may also enter into interest rate and index swaps and
purchase or sell related caps, floors and collars. The aggregate market value of
the Fund's portfolio securities covering call or put options will not exceed 25
percent of the Fund's net assets. See the discussion of "Options, Futures and
Forward Currency Transactions," and "Swaps, Caps, Floors and Collars" under
"Investment Methods and Risk Factors."
From time to time, the High Yield Fund may invest part or all of its assets
in U.S. Government securities, commercial notes or money market instruments. It
is anticipated that the dollar weighted average maturity of the Fund's portfolio
will range from 5 to 15 years under normal circumstances.
SECURITY TAX-EXEMPT FUND
The investment objective of Tax-Exempt Fund is to obtain as high a level of
interest income exempt from federal income taxes as is consistent with
preservation of stockholders' capital. Tax-Exempt Fund attempts to achieve its
objective by investing primarily in debt securities, the interest on which is
exempt from federal income taxes, including the alternative minimum tax. Under
normal circumstances, at least 80 percent of the Fund's net assets will be
invested in such tax-exempt securities.
The securities in which the Fund invests include debt obligations issued by
or on behalf of the states, territories and possessions of the United States,
the District of Columbia, and their political subdivisions, agencies,
authorities and instrumentalities, including multi-state agencies or authorities
(and may include certain private activity bonds the interest on which is subject
to the alternative minimum tax). These securities are referred to as "municipal
securities" and are described in more detail in the Funds' Statement of
Additional Information.
The Fund's investments in municipal securities are limited to securities of
"investment grade" quality, that is, securities rated within the four highest
rating categories of Moody's (Aaa, Aa, A, Baa) or S&P (AAA, AA, A, BBB), except
that the Fund may purchase unrated municipal securities (i) where the securities
are guaranteed as to principal and interest by the full faith and credit of the
U.S. Government or are short-term municipal securities (those having a maturity
of less than one year) of issuers having outstanding at the time of purchase an
issue of municipal bonds having one of the four highest ratings, or (ii) where,
in the opinion of the Investment Manager, the unrated municipal securities are
comparable in quality to those within the four highest ratings. However,
Tax-Exempt Fund will not purchase an unrated municipal security (other than a
security described in (i) above) if, after such purchase, more than 20 percent
of the Fund's total assets would be invested in such unrated municipal
securities.
With respect to rated securities, there is no percentage limitation on the
amount of the Fund's assets which may be invested in securities within any
particular rating classification, but the Fund anticipates that it will invest
no more than 25 percent of its total assets in securities rated Baa by Moody's
or BBB by Standard & Poor's. A description of the ratings is contained in
Appendix B to this Prospectus. Such securities have speculative characteristics
as discussed under "Investment Methods and Risk Factors."
If the Fund holds a security whose rating drops below Baa or BBB, the
Investment Manager will reevaluate the credit risk presented by the security in
light of current market conditions and determine whether to retain or dispose of
such security. The Fund will not retain securities rated below Baa or BBB in an
amount that exceeds 5 percent of its net assets.
Tax-Exempt Fund invests primarily in municipal bonds with maturities
greater than one year. It is expected that the Fund's average portfolio maturity
under normal circumstances will be in the 15- to 25-year range. Tax-Exempt Fund
also will invest for various purposes in short-term (maturity equal to or less
than one year) securities
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SECURITY FUNDS
PROSPECTUS
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which, to the extent practicable will be short-term municipal securities.
Short-term investments may be made, pending investment of funds in municipal
bonds, in order to maintain liquidity, to meet redemption requests, or to
maintain a temporary "defensive" investment position when, in the opinion of the
Investment Manager, it is advisable to do so on account of current or
anticipated market conditions. Except when in a temporary defensive position,
investments in short-term municipal securities will represent less than 20
percent of the Fund's total assets.
From time to time, on a temporary basis, Tax-Exempt Fund may invest in
fixed income obligations on which the interest is subject to federal income tax.
Except when the Fund is in a temporary "defensive" investment position, it will
not purchase a taxable security if, as a result, more than 20 percent of its
total assets would be invested in taxable securities. This limitation is a
fundamental policy of Tax-Exempt Fund, and may not be changed without a majority
vote of the Fund's outstanding shares. Temporary taxable investments of the Fund
may consist of obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, commercial paper rated A-1 by S&P or Prime-1 by
Moody's, corporate obligations rated AAA or AA by S&P or Aaa or Aa by Moody's,
certificates of deposit or bankers' acceptances of domestic banks or thrifts
with at least $2 billion in assets, or repurchase agreements with such banks or
with broker-dealers.
The Fund may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
Tax-exempt interest on private activity bonds and exempt-interest dividends
attributable to private activity bonds generally are treated as tax preference
items for purposes of the alternative minimum tax. The Fund may purchase private
activity bonds, such as industrial development bonds, when other bonds are not
available and when the yield differential between private activity bonds and
other municipal bonds justifies their purchase.
From time to time, Tax-Exempt Fund may purchase municipal securities on a
when-issued or delayed delivery basis. The Fund does not believe that its net
asset value or income will be adversely affected by its purchase of municipal
securities on a when-issued or delayed delivery basis. For further information
regarding when-issued purchases, see "Investment Methods and Risk Factors" and
the Funds' Statement of Additional Information.
Tax-Exempt Fund may also purchase from banks or broker/dealers, municipal
securities together with the right to resell the securities to the seller at an
agreed-upon price or yield within a specified period prior to the maturity date
of the securities. Such a right to resell is commonly known as a "put" and is
also referred to as a "stand-by commitment" on the part of the seller. The price
which Tax-Exempt Fund pays for the municipal securities with puts generally is
higher than the price which otherwise would be paid for the municipal securities
alone. The Fund uses puts for liquidity purposes in order to permit it to remain
more fully invested in municipal securities than would otherwise be the case by
providing a ready market for certain municipal securities in its portfolio at an
acceptable price. The put generally is for a shorter term than the maturity of
the municipal security and does not restrict in any way the Fund's ability to
dispose of (or retain) the municipal security. In order to ensure that the
interest on municipal securities subject to puts is tax-exempt to the Fund, it
will limit its use of puts in accordance with current interpretations or rulings
of the Internal Revenue Service. Because it is difficult to evaluate the
likelihood of exercise or the potential benefit of a put, puts will be
determined to have a "value" of zero, regardless of whether any direct or
indirect consideration was paid. There is a risk that the seller of the put may
not be able to repurchase the security upon exercise of the put by Tax-Exempt
Fund. For further information regarding puts and stand-by commitments, see the
Funds' Statement of Additional Information.
SECURITY CASH FUND
The investment objective of Cash Fund is to seek as high a level of current
income as is consistent with preservation of capital and liquidity. Cash Fund
will attempt to achieve its objective by investing at least 95 percent of its
total assets, measured at the time of investment, in a diversified portfolio of
highest quality money market instruments. Cash Fund may also invest up to 5
percent of its total assets, measured at the time of investment, in money market
instruments that are in the second-highest rating category for short-term debt
obligations. Money market instruments in which the Fund may invest consist of
the following:
U.S. Government Securities -- Obligations issued or guaranteed (as to
principal or interest) by the United States Government or its agencies (such as
the Small Business Administration and Government National Mortgage Association)
or instrumentalities (such as Federal Home Loan Banks and Federal Land Banks)
and instruments fully collateralized with such obligations.
Bank Obligations -- Obligations of banks or savings and loan associations
that are members of the Federal Deposit Insurance Corporation and instruments
fully collateralized with such obligations.
Corporate Obligations -- Commercial paper issued by corporations and rated
Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P, or other corporate debt
instruments rated Aaa or Aa or better by Moody's or AAA or AA or better by
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SECURITY FUNDS
PROPECTUS
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S&P, subject to the limitations on investment in instruments in the
second-highest rating category, discussed below.
Cash Fund may invest only in U.S. dollar denominated money market
instruments that present minimal credit risk and, with respect to 95 percent of
its total assets, measured at the time of investment, that are of the highest
quality. The Investment Manager will determine whether a security presents
minimal credit risk under procedures adopted by Cash Fund's Board of Directors.
A security will be considered to be highest quality (1) if rated in the highest
category, (e.g., Aaa or Prime-1 by Moody's or AAA or A-1 by S&P) by (i) any two
nationally recognized statistical rating organizations ("NRSROs") or, (ii) if
rated by only one NRSRO, by that NRSRO; (2) if issued by an issuer that has
short-term debt obligations of comparable maturity, priority, and security and
that are rated in the highest rating category by (i) any two NRSROs or, (ii) if
rated by only one NRSRO, by that NRSRO; or (3) an unrated security that is of
comparable quality to a security in the highest rating category as determined by
the Investment Manager and whose acquisition is approved or ratified by the
Board of Directors. With respect to 5 percent of its total assets, measured at
the time of investment, Cash Fund may also invest in money market instruments
that are in the second-highest rating category for short-term debt obligations
(e.g., rated Aa or Prime 2 by Moody's or AA or A-2 by S&P). A money market
instrument will be considered to be in the second-highest rating category under
the criteria described above with respect to investments considered highest
quality, as applied to instruments in the second-highest rating category. See
Appendix A to this Prospectus for a description of the principal types of
securities and instruments in which Cash Fund will invest as well as a
description of the above mentioned ratings.
Cash Fund may not invest more than 5 percent of its total assets, measured
at the time of investment, in the securities of any one issuer that are of the
highest quality or more than the greater of 1 percent of its total assets or
$1,000,000, measured at the time of investment, in securities of any one issuer
that are in the second-highest rating category, except that these limitations
shall not apply to U.S. Government securities. The Fund may exceed the 5 percent
limitation for up to three business days after the purchase of the securities of
any one issuer that are of the highest quality, provided that the Fund has
outstanding at any time not more than one such investment. In the event that an
instrument acquired by Cash Fund ceases to be of the quality that is eligible
for the Fund, the Fund shall promptly dispose of the instrument in an orderly
manner unless the Board of Directors determines that this would not be in the
best interests of the Fund.
Cash Fund will invest in money market instruments of varying maturities
(but no longer than thirteen months) in an effort to earn as high a level of
current income as is consistent with preservation of capital and liquidity. Cash
Fund intends to maintain a dollar-weighted average maturity in its portfolio of
not more than 90 days. The Fund seeks to maintain a stable net asset value of
$1.00 per share, although there can be no assurance that it will be able to do
so.
Cash Fund may acquire one or more of the types of securities listed above
subject to repurchase agreement. Not more than 10 percent of the Fund's total
assets may be invested in illiquid assets, which include repurchase agreements
with maturities of over seven days. Cash Fund may invest in instruments having
rates of interest that are adjusted periodically according to a specified market
rate for such investments ("Variable Rate Instruments"). The interest rate on a
Variable Rate Instrument is ordinarily determined by reference to, or is a
percentage of, an objective standard such as a bank's prime rate or the 91-day
U.S. Treasury Bill rate. Generally, the changes in the interest rate on Variable
Rate Instruments reduce the fluctuation in the market value of such securities.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation or depreciation is less than for fixed-rate obligations. Cash Fund
determines the maturity of Variable Rate Instruments in accordance with Rule
2a-7 under the Investment Company Act of 1940 which allows the Fund to consider
the maturity date of such instruments to be the period remaining until the next
readjustment of the interest rate rather than the maturity date on the face of
the instrument.
Cash Fund may acquire certain securities that are restricted as to
disposition under the federal securities laws, provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933, and subject to the Fund's policy that not more
than 10 percent of the Fund's total assets will be invested in illiquid assets.
See "Investment Methods and Risk Factors" for a discussion of Rule 144A
Securities.
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Funds are described in the
"Investment Objective and Policies" section of this Prospectus and in the
"Investment Objectives and Policies" and "Investment Policy Limitations"
sections of the Funds' Statement of Additional Information. The following is a
description of certain additional risk factors related to various securities,
instruments and techniques. The risks so described only apply to those Funds
which may invest in such securities and instruments or use such techniques. Also
included is a general description of some of the investment instruments,
techniques and methods which may be used by one or more of the Funds. The
methods described only apply to those Funds which may use such methods.
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SECURITY FUNDS
PROSPECTUS
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INVESTMENT VEHICLES
BAA OR BBB SECURITIES -- Certain of the Funds may invest in medium grade
debt securities (debt securities rated Baa by Moody's or BBB by S&P at the time
of purchase, or if unrated, of equivalent quality as determined by the
Investment Manager). Baa securities are considered to be "medium grade"
obligations by Moody's and BBB is the lowest classification which is still
considered an "investment grade" rating by S&P. Bonds rated Baa by Moody's or
BBB by S&P have speculative characteristics and may be more susceptible than
higher grade bonds to adverse economic conditions or other adverse circumstances
which may result in a weakened capacity to make principal and interest payments.
Corporate Bond, Limited Maturity Bond and High Yield Funds may invest in higher
yield debt securities in the lower rating (higher risk) categories of the
recognized rating services (commonly referred to as "junk bonds"). See Appendix
A to this Prospectus for a complete description of corporate bond ratings and
see "Risks Associated with Lower-Rated Debt Securities (Junk Bonds)."
U.S. GOVERNMENT SECURITIES -- Each of the Funds may invest in U.S.
Government securities which include obligations issued or guaranteed (as to
principal and interest) by the United States Government or its agencies (such as
the Small Business Administration, the Federal Housing Administration, and
Government National Mortgage Association), or instrumentalities (such as Federal
Home Loan Banks and Federal Land Banks), and instruments fully collateralized
with such obligations such as repurchase agreements. Some U.S. Government
securities, such as Treasury bills and bonds, are supported by the full faith
and credit of the U.S. Treasury; others are supported by the right of the issuer
to borrow from the Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. Government National Mortgage Association (GNMA) certificates
are mortgage-backed securities representing part ownership of a pool of mortgage
loans on which timely payment of interest and principal is guaranteed by the
full faith and credit of the U.S. Government. Although U.S. Government
securities are guaranteed by the U.S. Government, its agencies or
instrumentalities, shares of the Funds are not so guaranteed in any way.
CONVERTIBLE SECURITIES AND WARRANTS -- Certain of the Funds may invest in
debt or preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than non-convertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during the
life of the warrants (generally two or more years).
MORTGAGE BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS --
Certain of the Funds may invest in mortgage-backed securities (MBSs), including
mortgage pass through securities and collateralized mortgage obligations (CMOs).
MBSs include certain securities issued or guaranteed by the United States
government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA), or Federal Home Loan Mortgage Corporation (FHLMC); securities issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or one of
its agencies or instrumentalities; and securities issued by private issuers that
represent an interest in or are collateralized by mortgage loans. A mortgage
pass through security is a pro rata interest in a pool of mortgages where the
cash flow generated from the mortgage collateral is passed through to the
security holder. CMOs are obligations fully collateralized by a portfolio of
mortgages or mortgage-related securities. Certain of the Funds may invest in
securities known as "inverse floating obligations," "residual interest bonds,"
and "interest only" (IO) and "principal only" (PO) bonds, the market values of
which will generally be more volatile than the market values of most MBSs. An
inverse floating obligation is a derivative adjustable rate security with
interest rates that adjust or vary inversely to changes in market interest
rates. The term "residual interest" bond is used generally to describe those
instruments in collateral pools, such as CMOs, which receive any excess cash
flow generated by the pool once all other bondholders and expenses have been
paid. IOs and POs are created by separating the interest and principal payments
generated by a pool of mortgage-backed bonds to create two classes of
securities. Generally, one class receives interest only payments (IOs) and the
other class principal only payments (POs). MBSs have been referred to as
"derivatives" because the performance of MBSs is dependent upon and derived from
underlying securities.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. PREPAYMENT RISK reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's average
life and perhaps its yield. Borrowers are most likely to exercise their
prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others with
respect to the receipt of prepayments on the mortgages and the Fund may invest
in
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SECURITY FUNDS
PROSPECTUS
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CMOs which are subject to greater risk of prepayment. MARKET RISK reflects the
chance that the price of the security may fluctuate over time. The price of MBSs
may be particularly sensitive to prevailing interest rates, the length of time
the security is expected to be outstanding and the liquidity of the issue. In a
period of unstable interest rates, there may be decreased demand for certain
types of MBSs, and a fund invested in such securities wishing to sell them may
find it difficult to find a buyer, which may in turn decrease the price at which
they may be sold. CREDIT RISK reflects the chance that the Fund may not receive
all or part of its principal because the issuer or credit enhancer has defaulted
on its obligations. Obligations issued by U.S. Government-related entities are
guaranteed by the agency or instrumentality, and some, such as GNMA
certificates, are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the FNMA, are supported by the discretionary authority
of the U.S. Government to purchase the agency's obligations; still others, are
supported only by the credit of the instrumentality. Although securities issued
by U.S. Government-related agencies are guaranteed by the U.S. Government, its
agencies or instrumentalities, shares of the Fund are not so guaranteed in any
way. The performance of private label MBSs, issued by private institutions, is
based on the financial health of those institutions.
ASSET-BACKED SECURITIES -- Certain of the Funds may also invest in
"asset-backed securities." These include secured debt instruments backed by
automobile loans, credit card loans, home equity loans, manufactured housing
loans and other types of secured loans providing the source of both principal
and interest. Asset-backed securities are subject to risks similar to those
discussed above with respect to MBSs.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES -- Certain of the Funds may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. The price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Funds will enter
into when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be. No income accrues on
securities which have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery of the securities. If a Fund disposes of the
right to acquire a when-issued security prior to its acquisition or disposes of
its right to deliver or receive against a forward commitment, it may incur a
gain or loss. At the time a Fund enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash or liquid
securities equal to the value of the when-issued or forward commitment
securities will be established and maintained with its custodian and will be
marked to market daily. There is a risk that the securities may not be delivered
and that the Fund may incur a loss.
RESTRICTED SECURITIES (RULE 144A SECURITIES) -- Certain of the Funds may
invest in restricted securities which are securities that are restricted as to
disposition under the federal securities laws, provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933.
The High Yield Fund may purchase restricted securities, including
securities that are not eligible for resale pursuant to Rule 144A. The Fund may
acquire such securities through private placement transactions, directly from
the issuer or from security holders, generally at higher yields or on terms more
favorable to investors than comparable publicly traded securities. However, the
restrictions on resale of such securities may make it difficult for the Fund to
dispose of such securities at the time considered most advantageous, and/or may
involve expenses that would not be incurred in the sale of securities that were
freely marketable. Risks associated with restricted securities include the
potential obligation to pay all or part of the registration expenses in order to
sell certain restricted securities. A considerable period of time may elapse
between the time of the decision to sell a security and the time the Fund may be
permitted to sell it under an effective registration statement. If, during a
period, adverse conditions were to develop, the Fund might obtain a less
favorable price than prevailing when it decided to sell.
The Fund's Board of Directors is responsible for developing and
establishing guidelines and procedures for determining the liquidity of Rule
144A securities. As permitted by Rule 144A, the Board of Directors has delegated
this responsibility to the Investment Manager. In making the determination
regarding the liquidity of Rule 144A securities, the Investment Manager will
consider trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, the Investment Manager
may consider: (1) the frequency of trades and quotes; (2) the number of dealers
and potential purchasers; (3) dealer undertakings to make a market; and (4) the
nature of the security and of the market place trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). Investing in Rule 144A securities could have the effect of increasing
the amount of a Fund's assets invested in illiquid securities to the extent that
qualified institutional buyers become uninterested, for a time, in purchasing
these securities.
SOVEREIGN DEBT. Certain of the Funds may invest in sovereign debt
securities of emerging market governments, including Brady Bonds, provided they
are denominated in
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SECURITY FUNDS
PROSPECTUS
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U.S. dollars. Sovereign debt securities are those issued by emerging market
governments that are traded in the markets of developed countries or groups of
developed countries. Investments in such securities involve special risks. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal or interest when due in
accordance with the terms of such debt. Periods of economic uncertainty may
result in the volatility of market prices of sovereign debt, and in turn the
Fund's net asset value, to a greater extent than the volatility inherent in
domestic fixed income securities. A sovereign debtor's willingness or ability to
repay principal and pay interest in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
sovereign debtor's policy toward principal international lenders and the
political constraints to which a sovereign debtor may be subject. Emerging
market governments could default on their sovereign debt. Such sovereign debtors
also may be dependent on expected disbursements from foreign governments,
multilateral agencies and other entities abroad to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a sovereign
debtor's implementation of economic reforms and/or economic performance and the
timely service of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when
due, may result in the cancellation of such third parties' commitments to lend
funds to the sovereign debtor, which may further impair such debtor's ability or
willingness to timely service its debt.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing sovereign debt could adversely affect the Fund's
investments. Emerging markets are faced with social and political issues and
some of them have experienced high rates of inflation in recent years and have
extensive internal debt. Among other effects, high inflation and internal debt
service requirements may adversely affect the cost and availability of future
domestic sovereign borrowing to finance governmental programs, and may have
other adverse social, political and economic consequences. Political changes or
a deterioration of a country's domestic economy or balance of trade may affect
the willingness of countries to service their sovereign debt. Although the
Investment Manager intends to manage the Funds in a manner that will minimize
the exposure to such risks, there can be no assurance that adverse political
changes will not cause a Fund to suffer a loss of interest or principal on any
of its holdings.
In recent years, some of the emerging market countries have encountered
difficulties in servicing their sovereign debt obligations. Some of these
countries have withheld payments of interest and/or principal of sovereign debt.
These difficulties have also led to agreements to restructure external debt
obligations -- in particular, commercial bank loans, typically by rescheduling
principal payments, reducing interest rates and extending new credits to finance
interest payments on existing debt. In the future, holders of emerging market
sovereign debt securities may be requested to participate in similar
rescheduling of such debt. Certain emerging market countries are among the
largest debtors to commercial banks and foreign governments. At times certain
emerging market countries have declared a moratorium on the payment of principal
and interest on external debt; such a moratorium is currently in effect in
certain emerging market countries. There is no bankruptcy proceeding by which a
creditor may collect in whole or in part sovereign debt on which an emerging
market government has defaulted.
The ability of emerging market governments to make timely payments on their
sovereign debt securities is likely to be influenced strongly by a country's
balance of trade and its access to trade and other international credits. A
country whose exports are concentrated in a few commodities could be vulnerable
to a decline in the international prices of one or more of such commodities.
Increased protectionism on the part of a country's trading partners could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any. To the extent that a country receives payment for its
exports in currencies other than hard currencies, its ability to make hard
currency payments could be affected.
Investors should also be aware that certain sovereign debt instruments in
which a Fund may invest involve great risk. As noted above, sovereign debt
obligations issued by emerging market governments generally are deemed to be the
equivalent in terms of quality to securities rated below investment grade by
Moody's and S&P. Such securities are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations and involve major risk exposure to
adverse conditions. Some of such securities, with respect to which the issuer
currently may not be paying interest or may be in payment default, may be
comparable to securities rated D by S&P or C by Moody's. The Fund may have
difficulty disposing of and valuing certain sovereign debt obligations because
there may be a limited trading market for such securities. Because there is no
liquid secondary market for many of these securities, the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. Certain sovereign debt securities may be illiquid.
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BRADY BONDS. Certain of the Funds may invest in "Brady Bonds," which are
debt restructurings that provide for the exchange of cash and loans for newly
issued bonds. Brady Bonds are securities created through the exchange of
existing commercial bank loans to public and private entities in certain
emerging markets for new bonds in connection with debt restructuring under a
debt restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady. Brady Bonds recently have been issued by the governments of
Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Jordan, Mexico,
Nigeria, The Philippines, Uruguay, Venezuela, Ecuador and Poland and are
expected to be issued by other emerging market countries. Approximately $150
billion in principal amount of Brady Bonds has been issued to date. Fund
investors should recognize that Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the secondary market for Latin
American debt. The Salomon Brothers Brady Bond Index provides a benchmark that
can be used to compare returns of emerging market Brady Bonds with returns in
other bond markets, e.g., the U.S. bond market.
The High Yield Fund may invest only in collateralized Brady Bonds,
denominated in U.S. dollars. U.S. dollar-denominated, collateralized Brady
Bonds, which may be fixed rate par bonds or floating rate discount bonds, are
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds. Interest payments on such bonds generally are
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is equal to at least one year of rolling interest payments or, in
the case of floating rate bonds, initially is equal to at least one year's
rolling interest payments based on the applicable interest rate at the time and
is adjusted at regular intervals thereafter.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The High Yield Fund may invest in
fixed and floating rate loans ("Loans") arranged through private negotiations
between a corporate or foreign entity and one or more financial institutions
("Lenders"). Certain of the Fund's investments in Loans in emerging markets are
expected to be in the form of participations in Loans ("Participations") and
assignments of portions of Loans from third parties ("Assignments").
Participations typically will result in the Fund having a contractual
relationship only with the Lender, not with the borrower. The Fund will have the
right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the borrower. In connection with purchasing
Participations, the Fund generally will have no right to enforce compliance by
the borrower with the terms of the loan agreement relating to the Loan ("Loan
Agreement"), nor any rights of set-off against the borrower, and the Fund may
not directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Fund will assume the credit risk
of both the borrower and the Lender that is selling the Participation.
In the event of the insolvency of the Lender selling a Participation, the
Fund may be treated as a general creditor of the Lender and may not benefit from
any set-off between the Lender and the borrower. The Fund will acquire
Participations only if the Lender interpositioned between the Fund and the
borrower is determined by the Investment Manager to be creditworthy. When the
Fund purchases Assignments from Lenders, the Fund will acquire direct rights
against the borrower on the Loan. However, since Assignments are arranged
through private negotiations between potential assignees and assignors, the
rights and obligations acquired by the Fund as the purchaser of an Assignment
may differ from, and be more limited than, those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations.
The liquidity of such securities is limited and the Fund anticipates that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Fund's ability to dispose of particular
Assignments or Participations when necessary to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value.
ZERO COUPON SECURITIES -- Certain of the Funds may invest in certain zero
coupon securities that are "stripped" U.S. Treasury notes and bonds. The Funds
also may invest in zero coupon and other deep discount securities issued by
foreign governments and domestic and foreign corporations, including certain
Brady Bonds and other foreign debt and payment-in-kind securities. Zero coupon
securities pay no interest to holders prior to maturity, and payment-in-kind
securities pay interest in the form of additional securities. However, a portion
of the original issue discount on zero coupon securities and the "interest" on
payment-in-kind securities will be included in the investing Fund's income.
Accordingly, for the Fund to qualify for tax treatment as a regulated investment
company and to avoid certain taxes (see "Taxes" in the Statement of Additional
Information), the Fund may be required to distribute an amount that is greater
than the total amount of cash it actually receives. These distributions must be
made from the Fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. The Fund will not be able to purchase additional
income-
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SECURITY FUNDS
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producing securities with cash used to make such distributions and its current
income ultimately may be reduced as a result. Zero coupon and payment-in-kind
securities usually trade at a deep discount from their face or par value and
will be subject to greater fluctuations of market value in response to changing
interest rates than debt obligations of comparable maturities that make current
distributions of interest in cash.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS
- -- Each of the Funds may enter into repurchase agreements. Repurchase agreements
are transactions in which the purchaser buys a debt security from a bank or
recognized securities dealer and simultaneously commits to resell that security
to the bank or dealer at an agreed upon price, date and market rate of interest
unrelated to the coupon rate or maturity of the purchased security. Repurchase
agreements are considered to be loans which must be fully collateralized
including interest earned thereon during the entire term of the agreement. If
the institution defaults on the repurchase agreement, the Fund will retain
possession of the underlying securities. If bankruptcy proceedings are commenced
with respect to the seller, realization on the collateral by the Fund may be
delayed or limited and the Fund may incur additional costs. In such case, the
Fund will be subject to risks associated with changes in market value of the
collateral securities. The Fund intends to enter into repurchase agreements only
with banks and broker/dealers believed to present minimal credit risks.
The High Yield Fund may also enter into reverse repurchase agreements with
the same parties with whom it may enter into repurchase agreements. Under a
reverse repurchase agreement, the Fund would sell securities and agree to
repurchase them at a particular price at a future date. Reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale by the Fund may decline below the price of the securities the Fund
has sold but is obligated to repurchase. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes insolvent,
such buyer or its trustee or receiver may receive an extension of time to
determine whether to enforce the Fund's obligation to repurchase the securities,
and the Fund's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision.
The High Yield Fund also may enter into "dollar rolls," in which the Fund
sells fixed income securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund would forego principal and interest paid on such securities. The Fund would
be compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale. See "Investment Objectives and Policies" in the
Statement of Additional Information.
INVESTMENT METHODS
BORROWING -- Each of the Funds may borrow money from banks as a temporary
measure for emergency purposes, or to facilitate redemption requests.
From time to time, it may be advantageous for the Funds to borrow money
rather than sell existing portfolio positions to meet redemption requests.
Accordingly, the Funds may borrow from banks and the High Yield Fund may borrow
through reverse repurchase agreements and "roll" transactions, in connection
with meeting requests for the redemption of Fund shares. High Yield Fund may
borrow up to 33 1/3 percent; Limited Maturity Bond, Tax-Exempt and Cash Funds
may each borrow up to 10 percent; and Corporate Bond and U.S. Government Fund
may borrow up to 5 percent of total Fund assets. To the extent that a Fund
purchases securities while it has outstanding borrowings, it is using leverage,
i.e., using borrowed funds for investment. Leveraging will exaggerate the effect
on net asset value of any increase or decrease in the market value of a Fund's
portfolio. Money borrowed for leveraging will be subject to interest costs that
may or may not be recovered by appreciation of the securities purchased; in
certain cases, interest costs may exceed the return received on the securities
purchased. A Fund also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate. It is not expected that Cash Fund would
purchase securities while it had borrowings outstanding.
OPTIONS AND FUTURES TRANSACTIONS -- In seeking to protect against interest
rate changes that are adverse to its present or prospective positions, the High
Yield Fund may employ certain risk management practices involving the use of
options and futures contracts and options on futures contracts on U.S. and
foreign government securities. The High Yield Fund also may enter into interest
rate and index swaps and purchase or sell related caps, floors and collars.
Investment in derivative securities will be utilized for hedging purposes and
not for speculation. See "Swaps, Caps, Floors and Collars" below. See also
"Derivative Instruments: Options and Futures Strategies" in the Statement of
Additional Information. There can be no assurance that a Fund's risk management
practices will succeed.
Certain Funds may purchase put and call options and write such options on a
"covered" basis on securities that are traded on recognized securities exchanges
and over-the-counter ("OTC") markets. The Fund will cause its custodian to
segregate cash or liquid securities having a value sufficient to meet the Fund's
obligations under the option.
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The Funds also may enter into interest rate futures contracts and purchase and
write options to buy and sell such futures contracts, to the extent permitted
under regulations of the Commodities Futures Trading Commission ("CFTC"). The
Funds will not employ these practices for speculation; however, these practices
may result in the loss of principal under certain conditions. In addition,
certain provisions of the Internal Revenue Code of 1986, as amended ("Code"),
limit the extent to which a Fund may enter into forward contracts or futures
contracts or engage in options transactions. See "Taxes" in the Statement of
Additional Information.
SWAPS, CAPS, FLOORS AND COLLARS -- High Yield Fund may enter into interest
rate and index swaps, and the purchase or sale of related caps, floors and
collars. The Fund expects to enter into these transactions primarily to preserve
a return or spread on a particular investment or portion of its portfolio as a
technique for managing the portfolio's duration (i.e., the price sensitivity to
changes in interest rates) or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions as hedges and not as speculative investments, and will
not sell interest rate caps or floors if it does not own securities or other
instruments providing the income the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments) with respect to a
notional amount of principal.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate. The purchase of an
interest rate floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a specified
index falls below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
AMERICAN DEPOSITARY RECEIPTS (ADRS) -- The High Yield Fund may invest in
sponsored ADRs. ADRs are dollar-denominated receipts issued generally by U.S.
banks and which represent the deposit with the bank of a foreign company's
securities. ADRs are publicly traded on exchanges or over-the-counter in the
United States. Investors should consider carefully the substantial risks
involved in investing in securities issued by companies of foreign nations,
which are in addition to the usual risks inherent in domestic investments. See
"Foreign Investment Risks," below.
LENDING OF PORTFOLIO SECURITIES -- Certain Funds may lend securities to
broker-dealers, institutional investors, or other persons to earn income. The
principal risk is the potential insolvency of the broker-dealer or other
borrower. In this event, the Fund could experience delays in recovering its
securities and possibly capital losses. Any loan will be continuously secured by
collateral at least equal to the value of the security loaned. Such lending
could result in delays in receiving additional collateral or in the recovery of
the securities or possible loss of rights in the collateral should the borrower
fail financially.
RISK FACTORS
GENERAL RISK FACTORS -- Each Fund's net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions. The
value of fixed income securities held by the Funds generally fluctuates
inversely with interest rate movements. In other words, bond prices generally
fall as interest rates rise and generally rise as interest rates fall. Longer
term bonds held by the Funds are subject to greater interest rate risk. There is
no assurance that any Fund will achieve its investment objective.
FOREIGN INVESTMENT RISK -- Investment in foreign securities involves risks
and considerations not present in domestic investments. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. The securities of non-U.S. issuers generally are not
registered with the SEC, nor are the issuers thereof usually subject to the
SEC's reporting requirements. Accordingly, there may be less publicly available
information about foreign securities and issuers than is available with respect
to U.S. securities and issuers. A Fund's income and gains from foreign issuers
may be subject to non-U.S. withholding or other taxes, thereby reducing their
income and gains. In addition, with respect to some foreign countries, there is
the increased possibility of expropriation or confiscatory taxation, limitations
on the removal of funds or other assets of the Fund, political or social
instability, or diplomatic developments which could affect the investments of
the Fund in those countries. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, rate of savings and capital
reinvestment, resource self-sufficiency and balance of payments positions.
RISKS ASSOCIATED WITH INVESTMENT IN EMERGING MARKETS -- Certain of the
Funds may invest in emerging markets. Because of the special risks associated
with investing in emerging markets, an investment in a Fund making such
investments should be considered speculative. Investors are strongly advised to
consider carefully the special risks involved in emerging markets, which are in
addition to the usual risks of investing in developed foreign markets around the
world. Investing in emerging markets involves risks relating to potential
political economic
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SECURITY FUNDS
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instability within such markets and the risks of expropriation, nationalization,
confiscation of assets and property or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation in any emerging market, the
Fund could lose its entire investment in that market. Many emerging market
countries have experienced substantial, and in some periods extremely high,
rates of inflation for many years. Inflation and rapid fluctuations in inflation
rates have had and may continue to have negative effects on the economies and
securities markets of certain emerging market countries. Economies in emerging
markets generally are dependent heavily upon international trade and,
accordingly, have been and may continue to be affected adversely by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures imposed or negotiated by the countries with which
they trade. These economies also have been and may continue to be affected
adversely by economic conditions in the countries with which they trade.
The securities markets of emerging countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the United States and
other major markets. There also may be a lower level of monitoring and
regulation of emerging securities markets and the activities of investors in
such markets, and enforcement of existing regulations has been extremely
limited. Investments may also be made in former communist countries. There is a
possibility that these countries may revert to communism. In addition, brokerage
commissions, custodial services and other costs relating to investment in
foreign markets generally are more expensive than in the United States,
particularly with respect to emerging markets. Such markets have different
settlement and clearance procedures. In certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. The inability of
a Fund to make intended securities purchases due to settlement problems could
cause it to forego attractive investment opportunities. Inability to dispose of
a portfolio security caused by settlement problems could result either in losses
to a Fund due to subsequent declines in value of the portfolio security or, if a
Fund has entered into a contract to sell the security, could result in possible
liability to the purchaser.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for a Fund's portfolio securities in such
markets may not be readily available. Section 22(e) of the 1940 Act permits a
registered investment company to suspend redemption of its shares for any period
during which an emergency exists, as determined by the SEC. Accordingly, when a
Fund believes that appropriate circumstances warrant, it will promptly apply to
the SEC for a determination that an emergency exists within the meaning of
Section 22(e) of the 1940 Act. During the period commencing from a Fund's
identification of such conditions until the date of SEC action, the portfolio
securities of a Fund in the affected markets will be valued at fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors.
RISKS ASSOCIATED WITH LOWER-RATED DEBT SECURITIES (JUNK BONDS) -- Certain
of the Funds may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"). Debt rated BB, B, CCC, CC and C by S&P and rated Ba, B, Caa,
Ca and C by Moody's, is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation and C the highest degree of speculation. For Moody's, Ba
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Similarly, debt rated Ba or BB and below is
regarded by the relevant rating agency as speculative. Debt rated C by Moody's
or S&P is the lowest quality debt that is not in default as to principal or
interest and such issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Such securities are
also generally considered to be subject to greater risk than higher quality
securities with regard to a deterioration of general economic conditions.
Ratings of debt securities represent the rating agency's opinion regarding their
quality and are not a guarantee of quality. Rating agencies attempt to evaluate
the safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value. Also, rating agencies may fail to make timely
changes in credit quality in response to subsequent events, so that an issuer's
current financial condition may be better or worse than a rating indicates.
The market value of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a
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SECURITY FUNDS
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sustained period of rising interest rates, highly leveraged issuers of lower
quality securities may experience financial stress. During such periods, such
issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations may also be
adversely affected by specific developments affecting the issuer, such as the
issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. Similarly, certain emerging market
governments that issue lower quality debt securities are among the largest
debtors to commercial banks, foreign governments and supranational organizations
such as the World Bank and may not be able or willing to make principal and/or
interest repayments as they come due. The risk of loss due to default by the
issuer is significantly greater for the holders of lower quality securities
because such securities are generally unsecured and are often subordinated to
other creditors of the issuer.
Lower quality debt securities of corporate issuers frequently have call or
buy-back features which would permit an issuer to call or repurchase the
security from the Fund. If an issuer exercises these provisions in a declining
interest rate market, the Fund may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition,
the Fund may have difficulty disposing of lower quality securities because there
may be a thin trading market for such securities. There may be no established
retail secondary market for many of these securities, and the Fund anticipates
that such securities could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary market also may have an
adverse impact on market prices of such instruments and may make it more
difficult for the Fund to obtain accurate market quotations for purposes of
valuing the securities in the portfolio of the Fund.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
quality securities, especially in a thinly traded market. The High Yield Fund
also may acquire lower quality debt securities during an initial underwriting or
may acquire lower quality debt securities which are sold without registration
under applicable securities laws. Such securities involve special considerations
and risks.
Factors having an adverse effect on the market value of lower rated
securities or their equivalents purchased by the Fund will adversely impact net
asset value of the Fund. See "Risk Factors" in the Statement of Additional
Information. In addition to the foregoing, such factors may include: (i)
potential adverse publicity; (ii) heightened sensitivity to general economic or
political conditions; and (iii) the likely adverse impact of a major economic
recession. The Fund also may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings, and the Fund may have limited legal recourse in the
event of a default. Debt securities issued by governments in emerging markets
can differ from debt obligations issued by private entities in that remedies
from defaults generally must be pursued in the courts of the defaulting
government, and legal recourse is therefore somewhat diminished. Political
conditions, in terms of a government's willingness to meet the terms of its debt
obligations, also are of considerable significance. There can be no assurance
that the holders of commercial bank debt may not contest payments to the holders
of debt securities issued by governments in emerging markets in the event of
default by the governments under commercial bank loan agreements.
The Investment Manager will attempt to minimize the speculative risks
associated with investments in lower quality securities through credit analyses
and by carefully monitoring current trends in interest rates, political
developments and other factors. Nonetheless, investors should carefully review
the investment objectives and policies of the Funds and consider their ability
to assume the investment risks involved before making an investment in the
Funds.
MANAGEMENT OF THE FUNDS
The management of the Funds' business and affairs is the responsibility of
the Board of Directors. Security Management Company, LLC (the "Investment
Manager"), 700 Harrison Street, Topeka, Kansas, is responsible for selection and
management of the Funds' portfolio investments. The Investment Manager is a
limited liability company which is ultimately controlled by Security Benefit
Life Insurance Company, a mutual life insurance company with over $15.5 billion
of insurance in force. The Investment Manager also acts as investment adviser to
Security Equity, Growth and Income, and Ultra Funds and SBL Fund. The Investment
Manager currently manages approximately $3.5 billion in assets.
Subject to the supervision and direction of the Funds' Board of Directors,
the Investment Manager manages the Fund portfolios in accordance with each
Fund's stated investment objective and policies and makes all investment
decisions. The Investment Manager has agreed that total annual expenses of the
respective Funds (including for any fiscal year, the management fee, but
excluding interest, taxes, brokerage commissions, extraordinary expenses and
Class B distribution fees) shall not for the Corporate Bond, Limited Maturity
Bond, U.S. Government and High Yield Funds exceed the level of expenses which
the Funds are permitted to bear under the most restrictive expense limitation
imposed by any state in which shares of the Fund are then qualified for sale and
shall not for Tax-Exempt and Cash Funds exceed one percent of each Fund's
average net
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assets for the year. The Investment Manager will contribute such funds to the
Funds or waive such portion of its compensation as may be necessary to insure
that such total annual expenses do not exceed any such limitation. As
compensation for its management services, the Investment Manager receives on an
annual basis, .5 percent of the average daily net assets of Corporate Bond,
Limited Maturity Bond, U.S. Government, Tax-Exempt and Cash Funds and .6 percent
of the average daily net assets of the High Yield Fund, computed on a daily
basis and payable monthly.
The Investment Manager also acts as the administrative agent for the Funds,
and as such performs administrative functions, and the bookkeeping, accounting
and pricing functions for the Funds. For this service the Investment Manager
receives on an annual basis, a fee of .09 percent of the average daily net
assets of Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Tax-Exempt Funds and .045 percent of the average daily net assets of Cash Fund,
calculated daily and payable monthly. The Investment Manager also acts as the
transfer agent and dividend disbursing agent for the Funds. The Funds' expenses
include fees paid to the Investment Manager as well as expenses of brokerage
commissions, interest, taxes, Class B distribution fees and extraordinary
expenses approved by the Board of Directors of the Funds.
For the year ended December 31, 1996, the total expenses, as a percentage
of average net assets, were 1.01 percent for Class A and 1.85 percent for Class
B shares of Corporate Bond Fund; .65 percent for Class A and 1.86 percent for
Class B shares of U.S. Government Fund; .90 percent for Class A and 1.88 percent
for Class B shares of Limited Maturity Bond Fund; .78 percent for Class A and
2.01 percent for Class B shares of Tax-Exempt Fund; and 1.01 percent for Cash
Fund. For the period August 5, 1996 (date of inception) to December 31, 1996,
the total expenses were 1.54 percent for Class A shares and 2.26 percent for
Class B shares of High Yield Fund.
PORTFOLIO MANAGEMENT
The Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield,
Tax-Exempt and Cash Funds will be managed by the Fixed Income Team of the
Investment Manager consisting of John Cleland, Chief Investment Strategist, Jane
Tedder, Tom Swank, Steve Bowser, Barb Davison, Greg Hamilton and Elaine Miller.
Greg Hamilton, Second Vice President of the Investment Manager, has had
day-to-day responsibility for managing Corporate Bond, Limited Maturity Bond and
Tax-Exempt Funds since January 1996. Steve Bowser, Assistant Vice President and
Portfolio Manager of the Investment Manager, has had day-to-day responsibility
for managing U.S. Government Fund since 1995. Tom Swank, Second Vice President
and Portfolio Manager for the Investment Manager, has had day-to-day
responsibility for managing the High Yield Fund since its inception in 1996.
John D. Cleland has been involved in the securities industry for more than
30 years. Before joining the Investment Manager in 1968, he was involved in the
investment business in securities and residential and commercial real estate for
approximately ten years. Mr. Cleland earned a Bachelor of Science degree from
the University of Kansas and an M.B.A. from Wharton School of Finance,
University of Pennsylvania.
Mr. Hamilton has been in the investment field since 1983. He received his
Bachelor of Arts degree in Business from Washburn University in 1984. Prior to
joining Security Management Company in January of 1993, he was First Vice
President, Treasurer and Portfolio Manager with Mercantile National Bank, Los
Angeles, California, from 1990 to 1993. From 1986 to 1990, he was Managing
Director of Consulting Services for Sendero Corporation, Scottsdale, Arizona.
Prior to Sendero Corporation, he was employed as Fixed Income Research Analyst
at Peoples Heritage Savings and Loan from 1983 to 1986.
Mr. Bowser joined the Investment Manager in 1992. Prior to joining the
Investment Manager, he was Assistant Vice President and Portfolio Manager with
the Federal Home Loan Bank of Topeka from 1989 to 1992. He was employed at the
Federal Reserve Bank of Kansas City in 1988 and began his career with the Farm
Credit System from 1982 to 1987, serving as a Senior Financial Analyst and
Assistant Controller. He graduated with a Bachelor of Science degree from Kansas
State University in 1982. He is a Chartered Financial Analyst.
Tom Swank has over ten years of experience in the investment field. He is a
Chartered Financial Analyst. Prior to joining the Investment Manager in 1992, he
was an Investment Underwriter and Portfolio Manager for U.S. West Financial
Services, Inc. from 1986 to 1992. From 1984 to 1986, he was a Commercial Credit
Officer for United Bank of Denver. From 1982 to 1984, he was employed as a Bank
Holding Company examiner for the Federal Reserve Bank of Kansas City - Denver
Branch. Mr. Swank graduated from Miami University in Ohio with a Bachelor of
Science degree in finance in 1982 and earned a Master of Business Administration
degree from the University of Colorado.
HOW TO PURCHASE SHARES
As discussed below, shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Tax-Exempt Funds may be purchased with either a
front-end or contingent deferred sales charge. Shares of Cash Fund are offered
by the Fund without a sales charge. Each of the Funds reserves the right to
withdraw all or any part of the offering made by this prospectus and to reject
purchase orders.
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SECURITY FUNDS
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As a convenience to investors and to save operating expenses, the Funds do
not issue certificates for Fund shares except upon written request by the
stockholder.
CORPORATE BOND, LIMITED MATURITY BOND,
U.S. GOVERNMENT, HIGH YIELD AND TAX-EXEMPT FUNDS
Security Distributors, Inc. (the "Distributor"), a wholly-owned subsidiary
of Security Benefit Group, Inc., is principal underwriter for Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield and Tax-Exempt Funds. Shares
of these Funds may be purchased through authorized investment dealers. In
addition, banks and other financial institutions that have an agreement with the
Distributor may make shares of these Funds available to their customers. The
minimum initial purchase must be $100 and subsequent purchases must be $100
unless made through an Accumulation Plan which allows subsequent purchases of
$20.
Orders for the purchase of shares of Corporate Bond, Limited Maturity Bond,
U.S. Government, High Yield and Tax-Exempt Funds will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by the Distributor (generally as of the
close of the Exchange on that day) plus the sales charge in the case of Class A
shares. Orders received by dealers or other firms prior to the close of the
Exchange and received by the Distributor prior to the close of its business day
will be confirmed at the offering price effective as of the close of the
Exchange on that day.
Orders for shares received by broker/dealers prior to that day's close of
trading on the New York Stock Exchange and transmitted to the Fund prior to its
close of business that day will receive the offering price equal to the net
asset value per share computed at the close of trading on the Exchange on the
same day plus, in the case of Class A shares, the sales charge. Orders received
by broker/dealers after that day's close of trading on the Exchange and
transmitted to the Fund prior to the close of business on the next business day
will receive the next business day's offering price.
ALTERNATIVE PURCHASE OPTIONS
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Tax-Exempt Funds offer two classes of shares: CLASS A SHARES - FRONT-END LOAD
OPTION. Class A shares are sold with a sales charge at the time of purchase.
Class A shares are not subject to a sales charge when they are redeemed (except
that shares sold in an amount of $1,000,000 or more without a front-end sales
charge will be subject to a contingent deferred sales charge for one year.) See
Appendix C on page 37 for a discussion of possible reductions in the front-end
sales charge.
CLASS B SHARES - BACK-END LOAD OPTION. Class B shares are sold without a
sales charge at the time of purchase, but are subject to a deferred sales charge
if they are redeemed within five years of the date of purchase. Class B shares
will automatically convert tax-free to Class A shares at the end of eight years
after purchase.
The decision as to which class is more beneficial to an investor depends on
the amount and intended length of the investment. Investors who would rather pay
the entire cost of distribution at the time of investment, rather than spreading
such cost over time, might consider Class A shares. Other investors might
consider Class B shares, in which case 100 percent of the purchase price is
invested immediately, depending on the amount of the purchase and the intended
length of investment. The Funds will not normally accept any purchase of Class B
shares in the amount of $250,000 or more.
Dealers or others receive different levels of compensation depending on
which class of shares they sell.
CLASS A SHARES
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Tax-Exempt Funds are offered at net asset value plus an initial
sales charge as follows:
SALES CHARGE
------------------------------------------------
Amount of Applicable Percentage of Percentage
Purchases at Percentage of Net Amount Reallowable
Offering Price Offering Price Invested to Dealers
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Less than $50,000 4.75% 4.99% 4.00%
$50,000 but less than $100,000 3.75% 3.90% 3.00%
$100,000 but less than $250,000 2.75% 2.83% 2.20%
$250,000 but less than $1,000,000 1.75% 1.78% 1.40%
$1,000,000 and over None None (See below)
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Purchases of Class A shares of the Corporate Bond, Limited Maturity Bond,
U.S. Government, High Yield and Tax-Exempt Funds in amounts of $1,000,000 or
more are made at net asset value (without a sales charge), but are subject to a
contingent deferred sales charge of one percent in the event of redemption
within one year following purchase. For a discussion of the contingent deferred
sales charge, see "Calculation and Waiver of Contingent Deferred Sales Charges"
on page 23.
The Distributor will pay a commission to dealers on such purchases of
$1,000,000 or more as follows: 1.00 percent on sales up to $5,000,000, plus .50
percent on sales of $5,000,000 or more up to $10,000,000 and .10 percent on any
amount of $10,000,000 or more.
The Investment Manager may, at its expense, pay a service fee to dealers
who satisfy certain criteria established by the Investment Manager from time to
time relating to the volume of their sales of Class A shares of Tax-Exempt Fund
and certain other Security Funds during prior periods and certain other factors,
including providing certain services to
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their clients who are stockholders of such Funds. Such services include
assisting stockholders in changing account options or enrolling in specific
plans, and providing stockholders with information regarding the Funds and
related developments.
Currently, service fees are paid on the aggregate value of accounts opened
after July 31, 1990, in Security Tax-Exempt, Equity, Asset Allocation, Global,
Social Awareness, Value, Ultra and Growth and Income Funds at the following
annual rates: .25 percent of aggregate net asset value for amounts of $100,000
but less than $5 million and .30 percent for amounts of $5,000,000 or more.
SECURITY INCOME FUND'S
CLASS A DISTRIBUTION PLAN
In addition to the sales charge deducted from Class A shares at the time of
purchase, each of Corporate Bond, Limited Maturity Bond, U.S. Government and
High Yield Funds is authorized, under a Distribution Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 (the "Class A Distribution Plan"), to
use its assets to finance certain activities relating to the distribution of its
shares to investors. This Plan permits payments to be made by these Funds to the
Distributor, to finance various activities relating to the distribution of their
Class A shares to investors, including, but not limited to, the payment of
compensation (including incentive compensation to securities dealers and other
financial institutions and organizations) to obtain various distribution-related
and/or administrative services for the Funds.
Under the Class A Distribution Plan, a monthly payment is made to the
Distributor in an amount computed at an annual rate of .25 percent of the
average daily net asset value of Corporate Bond, Limited Maturity Bond, U.S.
Government and High Yield Funds' Class A shares. The distribution fee is charged
to each Fund in proportion to the relative net assets of their Class A shares.
The distribution fees collected may be used by Corporate Bond, Limited Maturity
Bond, U.S. Government and High Yield Funds to finance joint distribution
activities, for example joint advertisements, and the costs of such joint
activities will be allocated among the Funds on a fair and equitable basis,
including on the basis of the relative net assets of their Class A shares.
The Class A Distribution Plan authorizes payment by the Class A shares of
these Funds of the cost of preparing, printing and distributing prospectuses and
Statements of Additional Information to prospective investors and of
implementing and operating the Plan.
In addition, compensation to securities dealers and others is paid from
distribution fees at an annual rate of .25 percent of the average daily net
asset value of Class A shares sold by such dealers and remaining outstanding on
the Fund's books to obtain certain administrative services for the Funds' Class
A stockholders. The services include, among other things, processing new
stockholder account applications and serving as the primary source of
information to customers in answering questions concerning the Funds and their
transactions with the Funds. The Distributor is also authorized to engage in
advertising, the preparation and distribution of sales literature and other
promotional activities on behalf of Corporate Bond, Limited Maturity Bond, U.S.
Government and High Yield Funds. Other promotional activities which may be
financed pursuant to the Plan include (i) informational meetings concerning
these Funds for registered representatives interested in selling shares of the
Funds and (ii) bonuses or incentives offered to all or specified dealers on the
basis of sales of a specified minimum dollar amount of Class A shares of these
Funds by the registered representatives employed by such dealer(s). The expenses
associated with the foregoing activities will include travel expenses, including
lodging. Additional information may be obtained by referring to the Funds'
Statement of Additional Information.
Corporate Bond, Limited Maturity Bond, U.S. Government and High Yield
Funds' Class A Distribution Plan may be terminated at any time by vote of the
directors of Income Fund, who are not interested persons of the Fund as defined
in the 1940 Act or by vote of a majority of the outstanding Class A shares. In
the event the Class A Distribution Plan is terminated by the Funds' Class A
stockholders or the Board of Directors, the payments made to the Distributor
pursuant to the Plan up to that time would be retained by the Distributor. Any
expenses incurred by the Distributor in excess of those payments would be
absorbed by the Distributor.
CLASS B SHARES
Class B shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Tax-Exempt Funds are offered at net asset value, without an
initial sales charge. With certain exceptions, these Funds may impose a deferred
sales charge on Class B shares redeemed within five years of the date of
purchase. No deferred sales charge is imposed on amounts redeemed thereafter. If
imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable. The deferred sales charge is retained by the Distributor.
Whether a contingent deferred sales charge is imposed and the amount of the
charge will depend on the number of years since the stockholder made a purchase
payment from which an amount is being redeemed, according to the following
schedule:
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PROSPECTUS
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YEAR SINCE CONTINGENT DEFERRED
PURCHASE WAS MADE SALES CHARGE
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and following 0%
Class B shares (except shares purchased through the reinvestment of
dividends and other distributions paid with respect to Class B shares) will
automatically convert on the eighth anniversary of the date such shares were
purchased to Class A shares which are subject to a lower distribution fee. This
automatic conversion of Class B shares will take place without imposition of a
front-end sales charge or exchange fee. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to the Investment Manager.) All shares purchased through
reinvestment of dividends and other distributions paid with respect to Class B
shares ("reinvestment shares") will be considered to be held in a separate
subaccount. Each time any Class B shares (other than those held in the
subaccount) convert to Class A shares, a pro rata portion of the reinvestment
shares held in the subaccount will also convert to Class A shares. Class B
shares so converted will no longer be subject to the higher expenses borne by
Class B shares. Because the net asset value per share of the Class A shares may
be higher or lower than that of the Class B shares at the time of conversion,
although the dollar value will be the same, a stockholder may receive more or
less Class A shares than the number of Class B shares converted. Under current
law, it is the Funds' opinion that such a conversion will not constitute a
taxable event under federal income tax law. In the event that this ceases to be
the case, the Board of Directors will consider what action, if any, is
appropriate and in the best interests of the Class B stockholders.
CLASS B DISTRIBUTION PLAN
Each of Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield
and Tax-Exempt Funds bears some of the costs of selling its Class B shares under
a Distribution Plan adopted with respect to its Class B shares ("Class B
Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("1940 Act"). Each Fund's Plan provides for payments at an annual rate of
1.00 percent of the average daily net asset value of its Class B shares. Amounts
paid by the Funds are currently used to pay dealers and other firms that make
Class B shares available to their customers (1) a commission at the time of
purchase normally equal to 4.00 percent of the value of each share sold and (2)
a service fee payable for the first year, initially, and for each year
thereafter, quarterly, in an amount equal to .25 percent annually of the average
daily net asset value of Class B shares sold by such dealers and other firms and
remaining outstanding on the books of the Funds.
NASD Rules limit the aggregate amount that each of the Funds may pay
annually in distribution costs for the sale of its Class B shares to 6.25
percent of gross sales of Class B shares since the inception of the Distribution
Plan, plus interest at the prime rate plus one percent on such amount (less any
contingent deferred sales charges paid by Class B stockholders to the
Distributor). The Distributor intends, but is not obligated, to continue to
apply or accrue distribution charges incurred in connection with the Class B
Distribution Plan which exceed current annual payments permitted to be received
by the Distributor from the Funds. The Distributor intends to seek full payment
of such charges from the Fund (together with annual interest thereon at the
prime rate plus one percent) at such time in the future as, and to the extent
that, payment thereof by the Funds would be within permitted limits.
Each Fund's Class B Distribution Plan may be terminated at any time by vote
of its directors who are not interested persons of the Fund as defined in the
1940 Act or by vote of a majority of the outstanding Class B shares. In the
event the Class B Distribution Plan is terminated by the Class B stockholders or
the Funds' Board of Directors, the payments made to the Distributor pursuant to
the Plan up to that time would be retained by the Distributor. Any expenses
incurred by the Distributor in excess of those payments would be absorbed by the
Distributor. The Funds make no payments in connection with the sale of their
Class B shares other than the distribution fee paid to the Distributor.
CALCULATION AND WAIVER OF
CONTINGENT DEFERRED SALES CHARGES
Any contingent deferred sales charge imposed upon redemption of Class A
shares (purchased in an amount of $1,000,000 or more) and Class B shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. No contingent deferred sales charge is imposed
upon redemption of amounts derived from (1) increases in the value above the net
cost of such shares due to increases in the net asset value per share of the
Fund; (2) shares acquired through reinvestment of income dividends and capital
gain distributions; or (3) Class A shares (purchased in an amount of $1,000,000
or more) held for more than one year or Class B shares held for more than five
years. Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed.
The contingent deferred sales charge is waived: (1) following the death of
a stockholder if redemption is made within one year after death; (2) upon the
disability (as
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SECURITY FUNDS
PROSPECTUS
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defined in Section 72(m)(7) of the Internal Revenue Code) of a stockholder prior
to age 65 if redemption is made within one year after the disability, provided
such disability occurred after the stockholder opened the account; (3) in
connection with required minimum distributions in the case of an IRA, SAR-SEP or
Keogh or any other retirement plan qualified under section 401(a), 401(k) or
403(b) of the Code; and (4) in the case of distributions from retirement plans
qualified under section 401(a) or 401(k) of the Internal Revenue Code due to (i)
returns of excess contributions to the plan, (ii) retirement of a participant in
the plan, (iii) a loan from the plan (repayment of loans, however, will
constitute new sales for purposes of assessing the contingent deferred sales
charge, (iv) "financial hardship" of a participant in the plan, as that term is
defined in Treasury Regulation section 1.401(k)1(d)(2), as amended from time to
time, (v) termination of employment of a participant in the plan, (vi) any other
permissible withdrawal under the terms of the plan. The contingent deferred
sales charge will also be waived in the case of redemptions of Class B shares of
the Funds pursuant to a systematic withdrawal program. See "Systematic
Withdrawal Program," page 30 for details.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Distributor, from time to time, will provide promotional incentives or
pay a bonus to certain dealers whose representatives have sold or are expected
to sell significant amounts of the Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Tax-Exempt Funds and/or certain other Funds managed
by the Investment Manager. Such promotional incentives will include payment for
attendance (including travel and lodging expenses) by qualifying registered
representatives (and members of their families) at sales seminars at luxury
resorts within or outside the United States. Bonus compensation may include
reallowance of the entire sales charge and may also include, with respect to
Class A shares, an amount which exceeds the entire sales charge and, with
respect to Class B shares, an amount which exceeds the maximum commission. The
Distributor, or the Investment Manager, may also provide financial assistance to
certain dealers in connection with conferences, sales or training programs for
their employees, seminars for the public, advertising, sales campaigns, and/or
shareholder services and programs regarding one or more of the funds managed by
the Investment Manager. Certain of the promotional incentives or bonuses may be
financed by payments to the Distributor under a Rule 12b-1 Distribution Plan.
The payment of promotional incentives and/or bonuses will not change the price
an investor will pay for shares or the amount that the Funds will receive from
such sale. No compensation will be offered to the extent it is prohibited by the
laws of any state or self-regulatory agency, such as the National Association of
Securities Dealers, Inc. ("NASD"). A Dealer to whom substantially the entire
sales charge on Class A shares is reallowed may be deemed to be an "underwriter"
under federal securities laws.
The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the Funds for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above. Banks currently are prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Funds' Board of Directors would consider what
action, if any, would be appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
The Investment Manager or Distributor also may pay a marketing allowance to
dealers who meet certain eligibility criteria. This allowance is paid with
reference to new sales of shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Tax-Exempt Funds in a calendar year. To be eligible
for this allowance in any given year, the dealer must sell a minimum of
$2,000,000 of Class A and Class B shares during that year. The marketing
allowance ranges from .15 percent to .75 percent of aggregate new sales
depending upon the volume of shares sold. See the Funds' Statement of Additional
Information for more detailed information about the marketing allowance.
CASH FUND
Shares of Cash Fund are offered at net asset value next determined after an
order is accepted. There is no sales charge or load. The minimum initial
investment in Cash Fund is $100 for each account. Subsequent investments may be
made in any amount of $20 or more. Cash Fund purchases may be made in any of the
following ways:
1. BY MAIL
(a) A check or negotiable bank draft should be sent to:
Security Cash Fund
P.O. Box 2548
Topeka, Kansas 66601
(b) Make check or draft payable to "SECURITY CASH FUND."
(c) For initial investment include a completed investment application found
on page 39 of this prospectus.
2. BY WIRE
(a) Call the Fund to advise of the investment. The Fund will supply an
account number at the time of the initial investment and provide
instructions for having your bank wire federal funds.
(b) Wire federal funds to:
Bank IV of Topeka
Security Distributors, Inc.
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SECURITY FUNDS
PROSPECTUS
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Topeka, Kansas 66603
Include investor's name and the Cash Fund account number.
(c) For initial investment, send a completed investment application to the
Fund at the above address.
3. THROUGH BROKER/DEALERS
Investors may, if they wish, invest in Cash Fund by purchasing shares
through registered broker/dealers. Such broker/dealers who process orders on
behalf of their customers may charge a fee for their services. Investments made
directly without the assistance of a broker/dealer are without charge.
Since Cash Fund invests in money market securities which require immediate
payment in federal funds, monies received from the sales of its shares must be
monies held by a commercial bank and be on deposit at one of the Federal Reserve
Banks. A record date for each stockholder's investment is established each
business day and used to distribute the following day's dividend. If federal
funds are received prior to 2:00 p.m. (Central time) the investment will be made
on that day and the investor will receive the following day's dividend. Federal
funds received after 2:00 p.m. on any business day will not be invested until
the following business day. The Fund will not be responsible for any delays in
the wire transfer system. All checks are accepted subject to collection at full
face value in United States funds and must be drawn in United States dollars on
a United States bank.
The Investment Manager may, at its expense, pay a service fee to dealers
who satisfy certain criteria established by the Investment Manager from time to
time relating to the volume of their sales of Cash Fund during prior periods and
certain other factors, including providing certain services to their clients who
are stockholders of the Fund. Currently, service fees are paid on the aggregate
value of Cash Fund accounts opened after July 31, 1990, at the following annual
rate: .25 percent of aggregate net asset value for amounts of $1,000,000 or
more.
PURCHASES AT NET ASSET VALUE
Class A shares of Corporate Bond, Limited Maturity Bond Fund, U.S.
Government, High Yield and Tax-Exempt Funds may be purchased at net asset value
by (1) directors, officers and employees of the Funds, the Funds' Investment
Manager or Distributor; directors, officers and employees of Security Benefit
Life Insurance Company and its subsidiaries; agents licensed with Security
Benefit Life Insurance Company; spouses or minor children of any such agents; as
well as the following relatives of any such directors, officers and employees
(and their spouses): spouses, grandparents, parents, children, grandchildren,
siblings, nieces and nephews; (2) any trust, pension, profit sharing or other
benefit plan established by any of the foregoing corporations for persons
described above; (3) retirement plans where third party administrators of such
plans have entered into certain arrangements with the Distributor or its
affiliates provided that no commission is paid to dealers; and (4) officers,
directors, partners or registered representatives (and their spouses and minor
children) of broker/dealers who have a selling agreement with the Distributor.
Such sales are made upon the written assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
transferred or resold except through redemption or repurchase by or on behalf of
the Funds.
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Tax-Exempt Funds may also be purchased at net asset value when
the purchase is made on the recommendation of (i) a registered investment
adviser, trustee or financial intermediary who has authority to make investment
decisions on behalf of the investor; or (ii) a certified financial planner or
registered broker-dealer who either charges periodic fees to its customers for
financial planning, investment advisory or asset management services, or
provides such services in connection with the establishment of an investment
account for which a comprehensive "wrap fee" is imposed. The Distributor must be
notified when a purchase is made that qualifies under this provision.
TRADING PRACTICES AND BROKERAGE
The portfolio turnover rate for the Corporate Bond, U.S. Government and
Tax-Exempt Funds, respectively, for the fiscal year ended December 31, 1996, was
as follows: Corporate Bond Fund - 292 percent; U.S. Government Fund - 75
percent; Limited Maturity Bond Fund - 105 percent; and Tax-Exempt Fund - 54
percent. The annualized portfolio turnover rate for the High Yield Fund for the
period August 5, 1996 (date of inception) to December 31, 1996, was 168 percent.
The Corporate Bond and Limited Maturity Bond Funds' portfolio turnover rate
generally is expected to be less than 100 percent, and that of the U.S.
Government Fund may exceed 100 percent, but is not expected to do so. The
portfolio turnover rate for the High Yield Fund may exceed 100 percent but it is
generally not expected to exceed 150 percent. Higher portfolio turnover subjects
a fund to increased brokerage costs and may, in some cases, have adverse tax
effects on a fund or its stockholders.
Cash Fund is expected to have a high portfolio turnover rate due to the
short maturities of its portfolio securities; this should not, however, affect
the Fund's income or net asset value since brokerage commissions are not
normally paid in connection with the purchase or sale of money market
instruments.
Transactions in portfolio securities are effected in the manner deemed to
be in the best interests of each Fund. In selecting a broker or dealer to
execute a specific transaction,
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all relevant factors will be considered. Portfolio transactions may be directed
to brokers who furnish investment information or research services to the
Investment Manager or who sell shares of the Funds. The Investment Manager may,
consistent with the NASD Rules of Fair Practice, consider sales of shares of the
Fund in the selection of a broker.
Securities held by the Funds may also be held by other investment advisory
clients of the Investment Manager, including other investment companies, and by
the Investment Manager's parent company, Security Benefit Life Insurance Company
("SBL"). Purchases or sales of the same security occurring on the same day
(which may include orders from SBL) may be aggregated and executed as a single
transaction, subject to the Investment Manager's obligation to seek best
execution. Aggregated purchases or sales are generally effected at an average
price and on a pro rata basis (transaction costs will also be shared on a pro
rata basis) in proportion to the amounts desired to be purchased or sold. See
the Funds' Statement of Additional Information for a more detailed description
of aggregated transactions.
HOW TO REDEEM SHARES
A stockholder may redeem shares at the net asset value next determined
after the time when such shares are tendered for redemption.
Shares will be redeemed on request of the stockholder in proper order to
the Funds' Investment Manager, Security Management Company, LLC, which serves as
the Funds' transfer agent. A request is made in proper order by submitting the
following items to the Investment Manager: (1) a written request for redemption
signed by all registered owners exactly as the account is registered, including
fiduciary titles, if any, and specifying the account number and the dollar
amount or number of shares to be redeemed; (2) a guarantee of all signatures on
the written request or on the share certificate or accompanying stock power; (3)
any share certificates issued for any of the shares to be redeemed; and (4) any
additional documents which may be required by the Investment Manager for
redemption by corporations or other organizations, executors, administrators,
trustees, custodians or the like. Transfers of shares are subject to the same
requirements. The signature guarantee must be provided by an eligible guarantor
institution, such as a bank, broker, credit union, national securities exchange
or savings association. A signature guarantee is not required for redemptions of
$10,000 or less, requested by and payable to all stockholders of record for an
account, to be sent to the address of record. The Investment Manager reserves
the right to reject any signature guarantee pursuant to its written procedures
which may be revised in the future. To avoid delay in redemption or transfer,
stockholders having questions should contact the Investment Manager by calling
1-800-888-2461, extension 3127.
The redemption price will be the net asset value of the shares next
computed after the redemption request in proper order is received by the
Investment Manager. In addition, stockholders of Cash Fund will receive any
undistributed dividends, including any dividend declared on the day of the
redemption. Payment of the amount due on redemption, less any applicable
deferred sales charge, will be made by check, or by wire at the sole discretion
of the Investment Manager, within seven days after receipt of the redemption
request in proper order. If a wire transfer is requested, the Investment Manager
must be provided with the name and address of the stockholder's bank as well as
the account number to which payment is to be wired. Checks will be mailed to the
stockholder's registered address (or as otherwise directed). Remittance by wire
(to a commercial bank account in the same name(s) as the shares are registered),
by certified or cashier's check, or by express mail, if requested, will be at a
charge of $15, which will be deducted from the redemption proceeds.
Cash Fund offers redemption by check. If blank checks are requested on the
Checking Privilege Request Form, the Fund will make a supply available. Such
checks may be drawn in any amount of $100 or more. When a check is presented to
Cash Fund for payment, it will redeem sufficient full and fractional shares to
cover the check. Such shares will be redeemed at the price next calculated
following receipt of any check which does not exceed the value of the account.
The price of Cash Fund shares may fluctuate from day-to-day and the price at the
time of redemption, by check or otherwise, may be less than the amount invested.
Redemption by check is not available if any shares are held in certificate form
or if shares being redeemed have not been on the Fund's books for at least 15
days. The availability of checkwriting privileges may encourage multiple
redemptions on an account. Whenever multiple redemptions occur, the difficulty
of monitoring the shareholder's cost basis in his or her investment increases.
In addition to the foregoing redemption procedures, the Funds repurchase
shares from broker/dealers at the price determined as of the close of business
on the day such offer is confirmed. Dealers may charge a commission on the
repurchase of shares.
At various times, requests may be made to redeem shares for which good
payment has not yet been received. Accordingly, payment of redemption proceeds
may be delayed until such time as good payment has been collected for the
purchase of the shares in question, which may take up to 15 days from the
purchase date.
Requests may also be made to redeem shares in an account for which the
stockholder's tax identification number has not been provided. To the extent
permitted by law, the redemption proceeds from such an account will be
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SECURITY FUNDS
PROSPECTUS
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reduced by $50 to reimburse for the penalty imposed by the Internal Revenue
Service for failure to report the tax identification number.
TELEPHONE REDEMPTIONS
Stockholders may redeem uncertificated shares in amounts up to $10,000 by
telephone request, provided that the stockholder has completed the Telephone
Redemption section of the application or a Telephone Redemption form which may
be obtained from the Investment Manager. The proceeds of a telephone redemption
will be sent to the stockholder at his or her address as set forth in the
application or in a subsequent written authorization with a signature guarantee.
Once authorization has been received by the Investment Manager, a stockholder
may redeem shares by calling the Funds at (800) 888-2461, extension 3127, on
weekdays (except holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central
time. Redemption requests received by telephone after the close of the New York
Stock Exchange (normally 3 p.m. Central time) will be treated as if received on
the next business day. Telephone redemptions are not accepted for IRA and
403(b)(7) accounts. A stockholder who authorizes telephone redemptions
authorizes the Investment Manager to act upon the instructions of any person
identifying themselves as the owner of the account or the owner's broker. The
Investment Manager has established procedures to confirm that instructions
communicated by telephone are genuine and will be liable for any losses due to
fraudulent or unauthorized instructions if it fails to comply with its
procedures. The Investment Manager's procedures require that any person
requesting a telephone redemption provide the account registration and number
and the owner's tax identification number, and such instructions must be
received on a recorded line. Neither the Fund, the Investment Manager, nor the
Distributor shall be liable for any loss, liability, cost or expense arising out
of any telephone redemption request, provided the Investment Manager complied
with its procedures. Thus, a stockholder who authorizes telephone redemptions
may bear the risk of loss from a fraudulent or unauthorized request. The
telephone redemption privilege may be changed or discontinued at any time by the
Investment Manager or the Funds.
During periods of severe market or economic conditions, telephone
redemptions may be difficult to implement and stockholders should make
redemptions by mail as described in "How to Redeem Shares" on page 26.
DIVIDENDS AND TAXES
It is the policy of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Tax-Exempt Funds to pay dividends from net investment income
monthly. It is the policy of Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Tax-Exempt Funds to distribute realized capital gains
(if any) in excess of any capital losses and capital loss carryovers, at least
once a year. Because Class A shares of Corporate Bond, Limited Maturity Bond,
U.S. Government, High Yield and Tax-Exempt Funds bear most of the costs of
distribution of such shares through payment of a front-end sales charge, while
Class B shares of these Funds bear such costs through a higher distribution fee,
expenses attributable to Class B shares, generally, will be higher and as a
result, income distributions paid by these Funds with respect to Class B shares
generally will be lower than those paid with respect to Class A shares. Any such
dividend payment or capital gains distribution will result in a decrease of the
net asset value of the shares in an amount equal to the payment or distribution.
All dividends and distributions are automatically reinvested on the payable date
in shares of the Funds at net asset value as of the record date (reduced by an
amount equal to the amount of the dividend or distribution) unless the
Investment Manager is previously notified in writing by the stockholder that
such dividends or distributions are to be received in cash. A stockholder may
also request that such dividends or distributions be directly deposited to the
stockholder's bank account. Dividends or distributions paid with respect to
Class A shares and received in cash may, within 30 days of the payment date, be
reinvested without a sales charge.
Each of Corporate Bond, Limited Maturity Bond, U.S. Government and High
Yield Funds (series of Income Fund), is to be treated separately in determining
the amounts of income and capital gains distributions. For this purpose, each
series will reflect only the income and gains, net of losses, of that series.
Certain requirements relating to the qualification of a Fund as a regulated
investment company may limit the extent to which a Fund will be able to engage
in certain investment practices, including transactions in options, futures
contracts, forwards, swaps and other types of derivative securities
transactions. In addition, if a Fund were unable to dispose of portfolio
securities due to settlement problems relating to foreign investments or due to
the holding of illiquid securities, the Fund's ability to qualify as a regulated
investment company might be affected.
Cash Fund's policy is to declare daily dividends of all of its net income
each day the Fund is open for business, increased or decreased by any realized
capital gains or losses. Such dividends are automatically credited to
stockholder accounts. Unless stockholders elect to receive cash, they will
receive such dividends in additional shares on the last business day of each
month at the net asset value on that date. If cash payment of dividends is
desired, investors may so indicate in the appropriate section of the Cash Fund
application and checks will be mailed within five business days after the
beginning of the month. Confirmation
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SECURITY FUNDS
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of Cash Fund dividends will be sent quarterly, and confirmations of purchases
and redemptions will be sent monthly. The amount of dividends may fluctuate from
day to day. If on any day net realized or unrealized losses on portfolio
securities exceed Cash Fund's income for that day and results in a decline of
net asset value per share below $1.00, the dividend for that day will be omitted
until the net asset value per share subsequently returns to $1.00 per share.
The Funds will not pay dividends or distributions of less than $25 in cash
but will automatically reinvest them. Each of the Funds intends to qualify as a
"regulated investment company" under the Internal Revenue Code. Such
qualification generally removes the liability for federal income taxes from the
Fund, and makes federal income tax upon income and capital gains generated by a
Fund's investments, the sole responsibility of its stockholders provided the
Fund continues to so qualify and distributes all of its net investment income
and net realized capital gain to its stockholders. Furthermore, the Funds
generally will not be subject to excise taxes imposed on certain regulated
investment companies provided that each Fund distributes 98 percent of its
ordinary income and 98 percent of its net capital gain income each year.
Tax-Exempt Fund intends to qualify to pay "exempt interest dividends" to
its stockholders. Tax-Exempt Fund will be so qualified if, at the close of each
quarter of its taxable year, at least 50 percent of the value of its total
assets consists of securities on which the interest payments are exempt from
federal tax. To the extent that Tax-Exempt Fund's dividends distributed to
stockholders are derived from earnings on interest income exempt from federal
tax and are designated as "exempt-interest dividends" by the Fund, they will be
excludable from a stockholder's gross income for federal income tax purposes.
The Fund will inform stockholders annually as to the portion of that year's
distributions from the Fund which constituted "exempt-interest dividends."
To the extent that Tax-Exempt Fund's dividends are derived from interest on
its temporary taxable investments or from an excess of net short-term capital
gain over net long-term capital loss, they are considered taxable ordinary
income for federal income tax purposes. Such dividends do not qualify for the
dividends-received deduction for corporations. Distributions by Tax-Exempt Fund,
if any, of net long-term capital gains in excess of net short-term capital
losses from the sale of securities are taxable to stockholders as long-term
capital gain regardless of the length of time the stockholder has owned Fund
shares. Furthermore, a loss realized by a stockholder on the redemption, sale or
exchange of shares of Tax-Exempt Fund with respect to which exempt-interest
dividends have been paid will be disallowed to the extent of the amount of such
exempt-interest dividends if such shares have been held by the stockholder for
six months or less.
Distributions of net investment income and realized net short-term capital
gain by Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Cash Funds are taxable to stockholders as ordinary income whether received in
cash or reinvested in additional shares. Distributions (designated by Corporate
Bond, Limited Maturity Bond, U.S. Government and High Yield Funds as "capital
gain dividends") of the excess, if any, of net long-term capital gains over net
short-term capital losses are taxable to stockholders as long-term capital gain
regardless of how long a stockholder has held the Fund's shares and regardless
of whether received in cash or reinvested in additional shares. Since Cash Fund
normally will not invest in securities having a maturity of more than one year,
it should not realize any long-term capital gains or losses.
At December 31, 1996, Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Tax-Exempt Funds, respectively, had accumulated net
realized losses on sales of investments in the following amounts: $12,356,928,
$69,564, $978,377, $36,585 and $1,477,887.
Certain dividends declared in October, November or December of a calendar
year are taxable to stockholders as though received on December 31 of that year
if paid to stockholders during January of the following calendar year.
Advice as to each year's taxable dividends and distributions, if
applicable, will be mailed on or before January 31 of the following year.
Stockholders should consult their tax adviser to determine the effect of
federal, state and local tax consequences to them from an investment in the
Funds.
The Funds are required by law to withhold 31 percent of taxable dividends
and distributions (including redemption proceeds) to stockholders who do not
furnish their correct taxpayer identification numbers, or are otherwise subject
to the backup withholding provisions of the Internal Revenue Code.
FOREIGN TAXES
Investment income and gains received from sources within foreign countries
may be subject to foreign income and other taxes. In this regard, withholding
tax rates in countries with which the United States does not have a tax treaty
are often as high as 30 percent or more. The United States has entered into tax
treaties with many foreign countries which entitle certain investors to a
reduced tax rate (generally ten to fifteen percent) or to exemptions from tax.
If applicable, the Funds will operate so as to qualify for such reduced tax
rates or tax exemptions whenever possible. While stockholders of the Funds will
indirectly bear the cost of any foreign tax withholding, they will not be able
to claim foreign tax credit or deduction for taxes paid by the Funds.
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28
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SECURITY FUNDS
PROSPECTUS
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DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is determined as of the close of
regular trading hours on the New York Stock Exchange (normally 3 p.m. Central
time) on each day that the Exchange is open for trading. The determination is
made by dividing the value of the portfolio securities of each Fund plus any
cash or other assets, less all liabilities, by the number of shares outstanding
of the Fund.
Securities which are listed or traded on a national securities exchange are
valued at the last sale price. If there are no sales on a particular day, then
the securities are valued at the last bid price. All other securities for which
market quotations are readily available are valued on the basis of the last
current bid price. If there is no bid price or if the bid price is deemed to be
unsatisfactory by the Board of Directors or by the Investment Manager, then the
securities are valued in good faith by such method as the Board of Directors
determines will reflect the fair market value.
Valuations of Tax-Exempt Fund's municipal securities are supplied by a
pricing service approved by the Board of Directors. Valuations furnished by the
pricing service are based upon appraisals from recognized municipal securities
dealers derived from information concerning market transactions and quotations.
Securities for which market quotations are not readily available (which are
expected to constitute the majority of Tax-Exempt Fund's portfolio securities)
are valued by the pricing service considering such factors as yields or prices
of municipal bonds of comparable quality, type of issue, coupon, maturity and
rating, indications as to value from dealers, and general market conditions. The
Fund's officers, under the general supervision of its Board of Directors, will
regularly review procedures used by, and valuations provided by, the pricing
service.
U.S. Government Fund values U.S. Government securities at market value, if
available. If market quotations are not available, the Fund will value
securities, other than securities with 60 days or less to maturity as discussed
below, at fair prices based on market quotations for securities of similar type,
yield, quality and duration.
The securities held by Cash Fund are valued on the basis of the amortized
cost valuation technique which does not take into account unrealized gains or
losses. The amortized cost valuation technique involves valuing an instrument at
its cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. A similar procedure may be used for valuing
securities held by the U.S. Government and Tax-Exempt Funds having 60 days or
less remaining to maturity, with the value of the security on the 61st day being
used rather than cost.
Because the expenses of distribution are borne by Class A shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Tax-Exempt Funds through a front-end sales charge and by Class B shares of such
Funds through an ongoing distribution fee, the expenses attributable to each
class of shares will differ, resulting in different net asset values. The net
asset value of Class B shares will generally be lower than the net asset value
of Class A shares as a result of the distribution fee charged to Class B shares.
It is expected, however, that the net asset value per share will tend to
converge immediately after the payment of dividends which will differ in amount
for Class A and B shares by approximately the amount of the different
distribution expenses attributable to Class A and B shares.
PERFORMANCE
The Funds may, from time to time, include performance data in
advertisements or reports to stockholders or prospective investors. Such
performance data may include quotations of "yield" for each of the Funds,
"effective yield" for Cash Fund, "taxable-equivalent yield" for Tax-Exempt Fund
and "average annual total return" and "aggregate total return" for Corporate
Bond, Limited Maturity Bond, U.S. Government, High Yield and Tax-Exempt Funds.
For Cash Fund, yield is calculated by measuring the income generated by a
hypothetical investment in the Fund over a seven-day period. This income is then
annualized by assuming that the amount of income generated over the seven-day
period is generated each week over a 52-week period and is shown as a percentage
of the investment.
Cash Fund's effective yield will be calculated similarly but, when
annualized, income earned by an investment in the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
With respect to Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Tax-Exempt Funds, yield is based on the investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income"),
and will be computed by dividing net investment income per share by the maximum
public offering price per share on the last day of the period.
Tax-Exempt Fund's taxable-equivalent yield begins with that portion of the
Fund's yield which is tax-exempt (determined using the same general formula used
to calculate yield), which is then adjusted by an amount necessary to give the
taxable yield equivalent to the tax-exempt yield at a stated income tax rate,
and added to that portion of the Fund's yield, if any, which is not tax-exempt.
Average annual total return will be expressed in terms of the average
annual compounded rate of return of a
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29
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SECURITY FUNDS
PROSPECTUS
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hypothetical investment in Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield or Tax-Exempt Fund over periods of one, five and ten
years (up to the life of the Fund). Such average annual total return figures
will reflect the deduction of the maximum sales charge and a proportional share
of Fund expenses on an annual basis, and will assume that all dividends and
distributions are reinvested when paid.
Aggregate total return will be calculated for any specified period by
assuming a hypothetical investment in Corporate Bond, Limited Maturity Bond,
U.S. Government, High Yield or Tax-Exempt Fund on the date of the commencement
of the period and assuming that all dividends and distributions are reinvested
when paid. The net increase or decrease in the value of the investment over the
period will be divided by its beginning value to arrive at aggregate total
return.
In addition, total return may also be calculated for several consecutive
one-year periods, expressing the total return as a percentage increase or
decrease in the value of the investment for each year relative to the ending
value for the previous year. Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Tax-Exempt Funds may from time to time quote total
return that does not reflect deduction of any applicable sales charge, which
charges, if reflected, would reduce the total return quoted.
Quotations of performance reflect only the performance of a hypothetical
investment in a Fund during the particular time period on which the calculations
are based. Such quotations for the Funds will vary based on changes in market
conditions and the level of the Fund's expenses, and no reported performance
figure should be considered an indication of performance which may be expected
in the future.
In connection with communicating performance to current or prospective
stockholders, the Funds also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or other unmanaged
indexes which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses. Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield and Tax-Exempt Funds will
include performance data for both Class A and Class B shares of the Funds in any
advertisement or report including performance data of the Fund.
For a more detailed description of the methods used to calculate
performance, see the Funds' Statement of Additional Information.
STOCKHOLDER SERVICES
ACCUMULATION PLAN
An investor in Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield or Tax-Exempt Fund may choose to begin a voluntary Accumulation Plan. This
allows for an initial investment of $100 minimum and subsequent investments of
$20 minimum at any time. An Accumulation Plan involves no obligation to make
periodic investments and is terminable at will.
Payments are made by sending a check to the Distributor who (acting as an
agent for the dealer) will purchase whole and fractional Fund shares as of the
close of business on such day as the payment is received. The investor will
receive a confirmation and statement after each investment. Investors may choose
to use "Secur-O-Matic" (automatic bank draft) to make their Fund purchases.
There is no additional charge for choosing to use Secur-O-Matic. An application
may be obtained by writing Security Distributors, Inc., 700 SW Harrison Street,
Topeka, Kansas 66636-0001 or by calling (913) 295-3127 or (800) 888-2461,
extension 3127.
SYSTEMATIC WITHDRAWAL PROGRAM
Stockholders who wish to receive regular payments of $25 or more may
establish a Systematic Withdrawal Program. Liquidation in this manner will only
be allowed if shares with a current offering price of $5,000 or more are
deposited with the Investment Manager, which will act as agent for the
stockholder under the program. Payments are available on a monthly, quarterly,
semiannual or annual basis. Shares are liquidated at net asset value. The
stockholder will receive a confirmation following each transaction. The program
may be terminated on written notice, or it will terminate automatically if all
shares are liquidated or withdrawn from the account.
A stockholder may establish a Systematic Withdrawal Program with respect to
Class B shares without the imposition of any applicable contingent deferred
sales charge, provided that such withdrawals do not in any 12-month period,
beginning on the date the Program is established, exceed 10 percent of the value
of the account on that date ("Free Systematic Withdrawals"). Free Systematic
Withdrawals are not available if a Program established with respect to Class B
shares provides for withdrawals in excess of 10 percent of the value of the
account in any Program year and, as a result, all withdrawals under such a
Program would be subject to any applicable contingent deferred sales charge.
Free Systematic Withdrawals will be made first by redeeming those shares that
are not subject to the contingent deferred sales charge and then by redeeming
shares held the longest. The contingent deferred sales charge applicable to a
redemption of Class B shares requested while Free Systematic Withdrawals are
being made will be calculated as described under "Calculation and Waiver of
Contingent Deferred Sales Charges," page 23. A Systematic Withdrawal form may be
obtained from the Funds.
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SECURITY FUNDS
PROSPECTUS
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EXCHANGE PRIVILEGE
Stockholders who own shares of the Funds may exchange those shares for
shares of another of the Funds, or for shares of the other mutual funds
distributed by the Distributor, which currently include Security Growth and
Income, Equity, Global, Asset Allocation, Social Awareness, Value, Ultra,
Emerging Markets Total Return, Global Asset Allocation and Global High Yield
Funds. Exchanges may be made only in those states where shares of the fund into
which an exchange is to be made are qualified for sale. No service fee is
presently imposed on such an exchange. Class A and Class B shares of the Funds
may be exchanged for Class A and Class B shares, respectively, of another fund
distributed by the Distributor or for shares of Cash Fund, which offers a single
class of shares. Any applicable contingent deferred sales charge will be
calculated from the date of the initial purchase without regard to the time
shares were held in Cash Fund.
For tax purposes, an exchange is a sale of shares which may result in a
taxable gain or loss. Special rules may apply to determine the amount of gain or
loss on an exchange occurring within ninety days after the exchanged shares were
acquired.
Exchanges of Class A shares from Corporate Bond, Limited Maturity Bond,
U.S. Government, High Yield, Tax-Exempt, Emerging Markets Total Return, Global
Asset Allocation and Global High Yield Funds are made at net asset value without
a front-end sales charge if (1) the shares have been owned for not less than 90
consecutive days prior to the exchange, (2) the shares were acquired pursuant to
a prior exchange from a Security Fund which assessed a sales charge on the
original purchase, or (3) the shares were acquired as a result of the
reinvestment of dividends or capital gains distributions. Exchanges of Class A
shares from Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield,
Tax-Exempt, Emerging Markets Total Return, Global Asset Allocation and Global
High Yield Funds, other than those described above, are made at net asset value
plus the sales charge described in the prospectus of the other Security Fund
being acquired, less the sales charge paid on the shares of these Funds at the
time of original purchase.
Because Cash Fund does not impose a sales charge or commission in
connection with sales of its shares, any exchange of Cash Fund shares acquired
through direct purchase or reinvestment of dividends will be based on the
respective net asset values of the shares involved and a sales charge will be
imposed equal to the sales charge that would be charged such stockholder if he
or she were purchasing for cash.
Stockholders should contact the Fund before requesting an exchange in order
to ascertain whether any sales charges are applicable to the shares to be
exchanged. In effecting the exchanges of Fund shares, the Investment Manager
will first cause to be exchanged those shares which would not be subject to any
sales charges.
Exchanges are made upon receipt of a properly completed Exchange
Authorization form. This privilege may be changed or discontinued at any time at
the discretion of the management of the Funds upon 60 days' notice to
stockholders. A current prospectus of the fund into which an exchange is made
will be given to each stockholder exercising this privilege.
EXCHANGE BY TELEPHONE
To exchange shares by telephone, a stockholder must hold shares in
non-certificate form and must either have completed the Telephone Exchange
section of the application or a Telephone Transfer Authorization form which may
be obtained from the Investment Manager. Once authorization has been received by
the Investment Manager, a stockholder may exchange shares by telephone by
calling the Funds at (800) 888-2461, extension 3127, on weekdays (except
holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central time. Exchange
requests received by telephone after the close of the New York Stock Exchange
(normally 3 p.m. Central time) will be treated as if received on the next
business day.
A stockholder who authorizes telephone exchanges authorizes the Investment
Manager to act upon the instructions of any person by telephone to exchange
shares between any identically registered accounts with the Funds listed above.
The Investment Manager has established procedures to confirm that instructions
communicated by telephone are genuine and will be liable for any losses due to
fraudulent or unauthorized instructions if it fails to comply with its
procedures. The Investment Manager's procedures require that any person
requesting an exchange by telephone provide the account registration and number
and the owner's tax identification number and such instructions must be received
on a recorded line. Neither the Fund, the Investment Manager nor the Distributor
will be liable for any loss, liability, cost or expense arising out of any
request, including any fraudulent request, provided the Investment Manager
complied with its procedures. Thus, a stockholder who authorizes telephone
exchanges may bear the risk of loss from a fraudulent or unauthorized request.
In periods of severe market or economic conditions, the telephone exchange
of shares may be difficult to implement and stockholders should make exchanges
by writing to Security Distributors, Inc., 700 Harrison Street, Topeka, Kansas
66636-0001. The telephone exchange privilege may be changed or discontinued at
any time at the discretion of the management of the Funds.
RETIREMENT PLANS
The Funds have available tax-qualified retirement plans for individuals,
prototype plans for the self-employed,
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SECURITY FUNDS
PROSPECTUS
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pension and profit sharing plans for corporations and custodial accounts for
employees of public school systems and organizations meeting the requirements of
Section 501(c)(3) of the Internal Revenue Code. Further information concerning
these plans is contained in the Funds' Statement of Additional Information.
GENERAL INFORMATION
ORGANIZATION
The Articles of Incorporation of Income and Tax-Exempt Funds provide for
the issuance of an indefinite number of shares of capital stock in one or more
classes or series, and the Articles of Incorporation of Cash Fund provide for
the issuance of an indefinite number of shares of capital stock in one or more
series.
Income Fund has authorized capital stock of $1.00 par value. Its shares are
currently issued in seven series, Corporate Bond Fund, Limited Maturity Bond
Fund, U.S. Government Fund, High Yield Fund, Emerging Markets Total Return Fund,
Global Asset Allocation Fund and Global High Yield Fund. The shares of each
series represent a pro rata beneficial interest in that series' net assets and
in the earnings and profits or losses derived from the investment of such
assets.
Tax-Exempt and Cash Funds have authorized capital stock of $0.10 par value
per share.
Each of the Funds (except Cash Fund) currently issues two classes of shares
which participate proportionately based on their relative net asset values in
dividends and distributions and have equal voting, liquidation and other rights
except that (i) expenses related to the distribution of each class of shares or
other expenses that the Board of Directors may designate as class expenses from
time to time, are borne solely by each class; (ii) each class of shares has
exclusive voting rights with respect to any Distribution Plan adopted for that
class; (iii) each class has different exchange privileges; and (iv) each class
has a different designation.
When issued and paid for, each Fund's shares will be fully paid and
nonassessable by the Funds. Shares may be exchanged as described above under
"Exchange Privilege," but will have no other preference, conversion, exchange or
preemptive rights. Shares are transferable, redeemable and assignable and have
cumulative voting privileges for the election of directors.
On certain matters, such as the election of directors, all shares of each
series of Income Fund vote together, with each share having one vote. On other
matters affecting a particular series, such as the Investment Advisory Contract
or the fundamental investment policies, only shares of that series are entitled
to vote, and a majority vote of the shares of that series is required for
approval of the proposal.
The Funds do not generally hold annual meetings of stockholders and will do
so only when required by law. Stockholders may remove directors from office by
votes cast in person or by proxy at a meeting of stockholders. Such a meeting
will be called at the written request of the holders of 10 percent of a Fund's
outstanding shares.
Although each Fund offers only its own shares, it is possible one Fund
might become liable for any misstatement, inaccuracy or incomplete disclosure in
this prospectus relating to another of the Funds. The Board of Directors of the
Funds has considered this risk and has approved the use of a combined
prospectus.
STOCKHOLDER INQUIRIES
Stockholders who have questions concerning their account or wish to obtain
additional information may write to the Security Funds at 700 SW Harrison
Street, Topeka, Kansas 66636-0001, or call (913) 295-3127 or 1-800-888-2461,
extension 3127.
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SECURITY FUNDS
PROSPECTUS APPENDIX A
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APPENDIX A
DESCRIPTION OF SHORT-TERM INSTRUMENTS
The types of instruments that will form the major part of Cash Fund's
investments are described below:
U.S. GOVERNMENT SECURITIES. Federal agency securities are debt obligations
which principally result from lending programs of the U.S. Government. Housing
and agriculture have traditionally been the principal beneficiaries of federal
credit programs, and agencies involved in providing credit to agriculture and
housing account for the bulk of the outstanding agency securities.
Some U.S. Government securities, such as Treasury bills and bonds, are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality.
U.S. Treasury bills are issued with maturities of any period up to one
year. Three-month bills are currently offered by the Treasury on a 13-week cycle
and are auctioned each week by the Treasury. Bills are issued in bearer form
only and are sold only on a discount basis, and the difference between the
purchase price and the maturity value (or the resale price if they are sold
before maturity) constitutes the interest income for the investor.
CERTIFICATES OF DEPOSIT. A certificate of deposit is a negotiable receipt
issued by a bank or savings and loan association in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate.
COMMERCIAL PAPER. Commercial paper is generally defined as unsecured
short-term notes issued in bearer form by large well-known corporations and
finance companies. Maturities on commercial paper range from a few days to nine
months. Commercial paper is also sold on a discount basis.
BANKER'S ACCEPTANCES. A banker's acceptance generally arises from a
short-term credit arrangement designed to enable businesses to obtain funds to
finance commercial transactions. Generally, an acceptance is a time draft drawn
on a bank by an exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then "accepted" by a bank that, in
effect, unconditionally guarantees to pay the face value of the instrument on
its maturity date.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A Prime rating is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Issuers rated Prime are further referred to
by use of numbers 1, 2 and 3 to denote relative strength within this highest
classification. Among the factors considered by Moody's in assigning ratings are
the following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Commercial paper rated "A" by Standard & Poor's Corporation ("S&P") has the
highest rating and is regarded as having the greatest capacity for timely
payment. Commercial paper rated A-1 by S&P has the following characteristics:
(1) liquidity ratios are adequate to meet cash requirements; (2) long-term
senior debt is rated "A" or better; (3) the issuer has access to at least two
additional channels of borrowing; (4) basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances; (5) typically, the
issuer's industry is well established and the issuer has a strong position
within the industry; and (6) the reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated A-1, A-2 or A-3.
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
AAA -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
- --------------------------------------------------------------------------------
33
<PAGE>
SECURITY FUNDS
PROSPECTUS APPENDIX A (Continued)
- --------------------------------------------------------------------------------
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other market
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category. The modifier 2 indicates
a mid-range ranking, and modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
STANDARD & POOR'S CORPORATION
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C -- The rating C is reserved for income bonds in which no interest is
being paid.
D -- Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
NOTE: Standard & Poor's ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
- --------------------------------------------------------------------------------
34
<PAGE>
SECURITY FUNDS
PROSPECTUS APPENDIX B
- --------------------------------------------------------------------------------
APPENDIX B
DESCRIPTION OF MUNICIPAL BOND RATINGS
The following are summaries of the ratings used by Moody's and Standard &
Poor's applicable to permitted investments of Tax-Exempt Fund:
MOODY'S INVESTORS SERVICE, INC.*
AAA -- Municipal bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
AA -- Municipal bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
BAA -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. Although
Industrial Revenue Bonds and Environmental Control Revenue Bonds are tax-exempt
issues, they are included in the corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category. The modifier 2 indicates a mid-range ranking, and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category. Moody's
does not apply numerical modifiers other than Aa1, A1 and Baa1 in its municipal
bond rating system, which offer the maximum security within the Aa, A and Baa
groups, respectively.
STANDARD & POOR'S CORPORATION**
AAA -- Municipal bonds rated AAA are highest grade obligations. They
possess the ultimate degree of protection as to principal and interest.
AA -- Municipal bonds rated AA also qualify as high grade obligations, and
in the majority of instances differ from AAA issues only in small degree.
A -- Municipal bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
NOTE: Standard & Poor's ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
RATINGS OF SHORT-TERM SECURITIES
MOODY'S INVESTORS SERVICE
The following ratings apply to short-term municipal notes and loans:
MIG 1 -- Loans bearing this designation are of the best quality, enjoying
strong protection from established cash flows for their servicing or from
established and broadbased access to the market for refinancing, or both.
MIG 2 -- Loans bearing this designation are of high quality with margins of
protection ample although not so large as in the preceding group.
The following ratings apply to both commercial paper and municipal paper:
PRIME-1: Issuers receiving this rating have a superior capacity for
repayment of short-term promissory obligations.
PRIME-2: Issuers receiving this rating have a strong capacity for repayment
of short-term promissory obligations.
STANDARD & POOR'S CORPORATION
The following ratings apply to short-term municipal notes:
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to repay principal and pay interest.
AA: Notes rated AA have a very strong capacity to repay principal and pay
interest and differ from AAA issues only in small degree.
The following ratings apply both to commercial paper and municipal paper:
A-1: This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
- --------------------------------------------------------------------------------
35
<PAGE>
SECURITY FUNDS
PROSPECTUS APPENDIX B (Continued)
- --------------------------------------------------------------------------------
* Moody's Investors Service, Inc. rates bonds of issuers which have $600,000 or
more of debt, except bonds of educational institutions, projects under
construction, enterprises without established earnings records and situations
where current financial data is unavailable.
** Standard & Poor's Corporation rates all governmental bodies having $1,000,000
or more of debt outstanding unless adequate information is not available.
- --------------------------------------------------------------------------------
36
<PAGE>
SECURITY FUNDS
PROSPECTUS APPENDIX C
- --------------------------------------------------------------------------------
APPENDIX C
REDUCED SALES CHARGES
CLASS A SHARES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Corporate Bond, Limited Maturity
Bond, U.S. Government, High Yield and Tax-Exempt Funds alone or in combination
with Class A shares of certain other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or a Statement of Intention (also referred to
as a "Letter of Intent"), the term "Purchaser" includes the following persons:
an individual; an individual, his or her spouse and children under the age of
21; a trustee or other fiduciary of a single trust estate or single fiduciary
account established for their benefit; an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Internal Revenue Code; or a
pension, profit-sharing or other employee benefit plan whether or not qualified
under Section 401 of the Internal Revenue Code.
RIGHTS OF ACCUMULATION
To reduce sales charges on purchases of Class A shares of Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield or Tax-Exempt Fund, a
Purchaser may combine all previous purchases of the Fund with a contemplated
current purchase and receive the reduced applicable front end sales charge. The
Distributor must be notified when a sale takes place which might qualify for the
reduced charge on the basis of previous purchases.
Rights of accumulation also apply to purchases representing a combination
of the Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield, Tax-Exempt, Growth and Income, Equity, Global, Asset Allocation,
Social Awareness, Value or Ultra Fund in those states where shares of the Fund
being purchased are qualified for sale.
STATEMENT OF INTENTION
A Purchaser of Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield or Tax-Exempt Fund may choose to sign a Statement of Intention within 90
days after the first purchase to be included thereunder, which will cover future
purchases of Class A shares of those Funds, Security Equity, Global, Asset
Allocation, Social Awareness, Value, Growth and Income or Ultra Fund. The amount
of these future purchases shall be specified and must be made within a 13-month
period (or 36-month period for purchases of $1 million or more) to become
eligible for the reduced front-end sales charge applicable to the actual amount
purchased under the statement. Five percent (5%) of the amount specified in the
Statement of Intention will be held in escrow shares until the Statement is
completed or terminated. These shares may be redeemed by the Fund if the
Purchaser is required to pay additional sales charges. Any dividends paid by the
Fund will be payable with respect to escrow shares. The Purchaser bears the risk
that the escrow shares may decrease in value.
A Statement of Intention may be revised during the 13-month (or, if
applicable, 36-month) period. Additional shares received from reinvestment of
income dividends and capital gains distributions are included in the total
amount used to determine reduced sales charges.
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of Corporate Bond, Limited
Maturity Bond, U.S. Government, High Yield or Tax-Exempt Fund have a one-time
privilege (1) to reinstate their accounts by purchasing shares without a sales
charge up to the dollar amount of the redemption proceeds; or (2) to the extent
the redeemed shares would have been eligible for the exchange privilege, to
purchase shares of another of the Funds, Security Growth and Income, Equity,
Global, Asset Allocation, or Ultra Fund, without a sales charge up to the dollar
amount of the redemption proceeds. To exercise this privilege, a stockholder
must provide written notice and the amount to be reinvested to the Fund within
30 days after the redemption request.
The reinstatement or exchange will be made at the net asset value next
determined after the reinvestment is received by the Fund.
- --------------------------------------------------------------------------------
37
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY
- --------------------------------------------------------------------------------
38
<PAGE>
SECURITY FUNDS
SECURITY CASH FUND APPLICATION
================================================================================
For IRA/KEOGH/Corporate Plans, complete this Application along with other plan
documents.
MAIL APPLICATION TO: Security Cash Fund, P.O. Box 2548, Topeka, KS 66601
- --------------------------------------------------------------------------------
INITIAL INVESTMENT (CHECK ONE BOX)
[ ] Enclosed is my check for $ made payable to Security Cash Fund.
--------------
[ ] On I/we wired $ through
--------------- --------------- ---------------------
Date Name of Bank
MINIMUM $100
for Fund account number
- ----------------------------- -------------------------
City State
SUBSEQUENT INVESTMENTS OF $20 CAN BE MADE AT ANY TIME
When investing by wire, call the Fund to advise of the investment. The Fund will
supply a control number for initial investment. Wire federal funds to Bank IV of
Topeka, Trust Department, Topeka, Kansas.
Attn:
----------------------------------------------------------
(Include investor's name and account number)
- --------------------------------------------------------------------------------
DIVIDENDS (CHECK ONE BOX)
[ ] Reinvest automatically all daily dividends and other distributions.
[ ] Cash payment of all dividends each month and send proceeds to investor.
- --------------------------------------------------------------------------------
CHECKING ACCOUNT PRIVILEGE
[ ] Please send a supply of checks permitting me/us to redeem shares in this
account by writing checks for $100 or more made payable to any person.
COMPLETE SIGNATURE CARD ON REVERSE SIDE. Allow three weeks for delivery of
check supply.
- --------------------------------------------------------------------------------
SPECIAL OPTIONS (CHECK APPLICABLE BOXES)
[ ] Telephone Exchange
[ ] Telephone Redemption
By checking the applicable boxes and signing this Application, Applicant
authorizes the Investment Manager to honor any telephone request for the
exchange and/or redemption of Fund shares (maximum telephone redemption is
$10,000), subject to the terms of the Fund's prospectus. The Investment Manager
has established reasonable procedures to confirm that instructions communicated
by telephone are genuine and may be liable for any losses due to fraudulent or
unauthorized instructions if it fails to comply with its procedures. The
procedures require that any person requesting a telephone redemption or exchange
provide the account registration and number and owner's tax identification
number and such request must be received on a recorded line.
THE AUTHORIZATION ON REVERSE SIDE FOR CORPORATION, PARTNERSHIP, TRUST, ETC.,
MUST BE COMPLETED AND RETURNED WITH THIS FORM.
- --------------------------------------------------------------------------------
[ ] Systematic Withdrawal Program (Minimum account $5,000)
Beginning , 19 , you are hereby authorized and
----------------------- -------
instructed to send a check for $
-----------------------
(minimum $25) drawn on approximately [ ] 11th day [ ] 26th day of the month.
Draw payment [ ]monthly [ ]quarterly [ ]semianually [ ]annually
- --------------------------------------------------------------------------------
ACCOUNT REGISTRATION (PLEASE PRINT)
[ ] Individual
[ ] Corporate
[ ] Non-Profit
[ ] Profit-Sharing
- ---------------------------------------------- --------------------------------
First Middle Last Owner's Taxpayer Identification
No. or Social Security No.
- ----------------------------------------------
First Middle Last
Industry Type
- ---------------------------------------------- ------------------
Name of Corporation, Trust, Partnership, etc. (Farming, Mgf., Sales, etc.)
Telephone
Business ( )
- ---------------------------------------------- -----------------
Street Address
Home ( )
- ---------------------------------------------- -----------------
City State Zip
If address is outside U.S. please indicate if U.S. Citizen [ ] Yes [ ] No
- --------------------------------------------------------------------------------
TAX WITHHOLDING
TAXPAYER IDENTIFICATION CERTIFICATION: Under the penalties of perjury, I (1)
certify that the number provided on this form is my correct taxpayer
identification number and (2),* that I am not subject to backup withholding
either because I have not been notified that I am subject to backup withholding
as a result of a failure to report all interest or dividends, or the Internal
Revenue Service has notified me that I am no longer subject to backup
withholding.
*The owner must strike out the language certifying that they are not subject to
backup withholding due to notified underreporting IF THE INTERNAL REVENUE
SERVICE NOTIFIED THEM THAT THEY ARE SUBJECT TO BACKUP WITHHOLDING, and they have
not received notice from the service advising that backup withholding has
terminated.
- --------------------------------------------------------------------------------
SIGNATURE(S) OF APPLICANTS
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications to avoid backup withholding.
- ------------------------------------------- -----------------------------------
Owner Joint Owner
- ------------------------------------------- -----------------------------------
Corporate Officer, Trustee, etc. Title
Date In case of joint ownership, both
--------------------------------------- must sign. If no form of ownership
is designated, then it will be
INVESTMENT DEALER assumed the ownership is "as
joint tenants, with right of
- ------------------------------------------- survivorship, and not as tenants
Name of Firm in common."
- ------------------------------------------- -----------------------------------
Street Dealer Authorized
- ------------------------------------------- -----------------------------------
City State Zip Account Representative
- --------------------------------------------------------------------------------
39
<PAGE>
SECURITY FUNDS
SECURITY CASH FUND APPLICATION (CONTINUED)
================================================================================
Checking Account Privilege - If you have elected this option, the following card
must be completed. This card is similar to one which must be signed when opening
any checking account. All joint owners named in the account registration must
sign this card. Names must be signed exactly as they appear in the account
registration. All persons eligible to sign checks for corporate accounts,
partnerships, trusts, etc. must sign this card.
- --------------------------------------------------------------------------------
The payment of funds on the conditions set forth below and on the reverse side
is authorized by the signature(s) appearing on the signature card. Security
Management Company, LLC, the Fund's Transfer Agent, is hereby appointed agent by
the person(s) signing this card and will cause the Fund to redeem a sufficient
number of shares from the account to cover checks presented for payment without
requiring signature guarantees. The Fund and its agents will not be liable for
any loss, expense or cost arising out of check redemptions or checks returned
without payment. SHARES OUTSTANDING IN THE ACCOUNT FOR LESS THAN 15 DAYS WILL
NOT BE LIQUIDATED TO PAY CHECKS PRESENTED UNLESS THE TRANSFER AGENT IS ASSURED
THAT GOOD PAYMENT HAS BEEN COLLECTED THROUGH NORMAL BANKING CHANNELS. The
Transfer Agent has the right not to honor checks that are for less than $100 or
checks in an amount exceeding the value of the account at the time the check is
presented for payment. This privilege is subject to the provisions of the
current prospectus of the Fund as amended from time to time. This agreement may
be modified or terminated at any time by the Fund or the Transfer Agent upon
notification mailed to the shareholder's address of record.
- --------------------------------------------------------------------------------
SECURITY CASH FUND SIGNATURE CARD
- --------------------------------------------------------------------------------
-------------------------------------------
Account Number
Authorized Signatures:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ ] Check here if two signatures are required on checks
[ ] Check here if only one signature required on checks.
In signing this card each signatory agrees to be subject to the customary rules
and regulations governing checking accounts and to the conditions set forth on
the reverse side. If the Checking Account Privilege is established after the
opening of the account, or if any change is made in the above information, all
signatures will have to be guaranteed.
- --------------------------------------------------------------------------------
AUTHORIZATION FOR REDEMPTION
CORPORATE RESOLUTION
I, , duly elected and acting Secretary of
---------------------------------------
, a corporation
- -----------------------------------------------------------------
organized and existing under the laws of
--------------------------------------,
certify that the following resolution is a true and correct copy of the
resolution adopted by the Board of Directors at its regular meeting held on
, which resolution is currently in
- ----------------------------------------------
full force and effect:
RESOLVED, That the below named individual(s) of this corporation are hereby
authorized to give notice, instructions, complete necessary forms, execute
withdrawals, and to transact any other business necessary on this corporation's
account invested in shares of Security Cash Fund. FURTHER RESOLVED, That this
corporation assumes entire responsibility for, and agrees to indemnify and hold
harmless Security Cash Fund and/or its agents against any and all claims,
liabilities, damages, actions, charges and expense sustained by action of the
below named individual(s).
- --------------------------------------- ---------------------------------------
(Print or type) Name and Title Signature(s)
- --------------------------------------- ---------------------------------------
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, I hereunto set my
hand and the seal of this corporation
this day of , 19
------ ------------ ----.
(CORPORATE SEAL) SECRETARY
-----------------------------
- --------------------------------------------------------------------------------
AUTHORIZATION FOR PARTNERSHIP, TRUST, OR RETIREMENT PLAN
We, the undersigned, being the principal partners or the trustees of the
- --------------------------------------------------------------------------------
(Partnership or Trust/Plan)
hereby state that we are authorized to invest the assets of the partnership or
trust/plan in Security Cash Fund. We also agree that
- --------------------------------------------------------------------------------
or -----------------------------------------------------------------------------
have individual authority to purchase, sell, assign, and transfer securities and
to sign checks issuable by the partnership or the trust/plan redeeming shares of
the Fund. We further state that this individual authority shall continue to be
honored until revoked by written notice from either of us and is received by the
Transfer Agent (Security Management Company, LLC). By signing this
authorization, we agree that Security Cash Fund, Security Management Company,
LLC, and Security Distributors, Inc., shall be indemnified and held harmless
from any loss, damage, cost or claim that may arise from any authorized or
unauthorized use of the assets or checks of the partnership or trust/plan in
connection with the holdings of the Fund.
- --------------------------------------- ---------------------------------------
Print or type name Signature(s)
- --------------------------------------------------------------------------------
SIGNATURE GUARANTEED BY
- --------------------------------------------------------------------------------
40
<PAGE>
SECURITY FUNDS
APPLICATION
1. ACCOUNT REGISTRATION (THE OWNER(S) MUST COMPLETE SECTION 10 "CERTIFICATION
AND SIGNATURE" TO ESTABLISH AN ACCOUNT.)
I hereby authorize the establishment of the account marked below and acknowledge
receipt of the Fund's current prospectus. Check is enclosed for
$ (minimum $100) payable to SECURITY DISTRIBUTORS, INC. as
------------------
an initial investment. I am of legal age in the state of my residence and wish
to purchase shares of the Fund indicated below. By the execution of this
application, the undersigned represents and warrants that the investor has full
right, power and authority to make this investment and the undersigned is duly
authorized to sign this application and to purchase or redeem shares of the Fund
on behalf of the investor. No stock certificate is to be issued unless I so
request. See the prospectus for information about an Accumulation Plan which
allows a minimum investment of $100 and subsequent investments of $20.
- -------------------------------------------------------------
Owner/Custodian/Trustee Name (Print)
- -------------------------------------------------------------
Social Security Number Date of Birth
- -------------------------------------------------------------
Joint Owner/Minor Name (Print) [ ] Check if UGMA/UTMA Account
- -------------------------------------------------------------
Social Security Number Date of Birth
2. ADDRESS AND TELEPHONE NUMBER
- ------------------------------ -----------------------------------------------
Street Address Daytime Telephone
(for first individual)
- ------------------------------ Citizenship [ ] U.S. [ ] Other
City, State, Zip Code ----------------
Indicate Country
3. INITIAL INVESTMENT
CLASS OF SHARES (MUST SELECT ONE ONLY) ( ) A SHARES ( ) B SHARES (IF NO CLASS IS
SELECTED, PURCHASE(S) WILL BE MADE OF A SHARES)
<TABLE>
<S> <C> <C> <C>
SECURITY EQUITY FUND $ SECURITY LIMITED MATURITY BOND FUND $
------ ------
SECURITY GLOBAL FUND $ SECURITY U.S. GOVERNMENT FUND $
------ ------
SECURITY ASSET ALLOCATION FUND $ SECURITY GLOBAL AGGRESSIVE BOND FUND $
------ ------
SECURITY GROWTH & INCOME FUND $ SECURITY HIGH YIELD FUND $
------ ------
SECURITY ULTRA FUND $ SECURITY TAX-EXEMPT FUND $
------ ------
SECURITY CASH FUND $ SECURITY SOCIAL AWARENESS FUND $
------ ------
SECURITY CORPORATE BOND FUND $
------
</TABLE>
4. DIVIDEND OPTION (CHECK ONE ONLY)
(If no option is selected, distributions will be reinvested into the Fund that
pays them.)
[ ] Reinvest all dividends and capital gains
[ ] Reinvest only capital gains and pay dividends in cash
[ ] Cash payment of dividends and capital gains
[ ] Invest dividends and capital gains into another Security Fund account
(must be same class of shares; if new account, number will be assigned)
Fund Name Account Number
------------------------------------ ------------------
[ ] Send distributions to third party below
Account No. (if applicable)
----------------------------------------------------
Name
---------------------------------------------------------------------------
Address
------------------------------------------------------------------------
5. SYSTEMATIC WITHDRAWAL PROGRAM (FOR ACCOUNTS OF $5,000 OR MORE)
You are hereby authorized to send a check(s) beginning:
Month Day [ ] 11th or [ ] 26th 19
---------------- ----
(if no date is selected withdrawal will be made on the 26th)
Payable: [ ] monthly [ ] quarterly [ ] semi-annually [ ] annually
Fund Name Fund Name
----------------------------- ------------------------------
Account No. (if known) Account No. (if known)
---------------- ---------------
(if 3 or more funds, please send written instructions)
Level Payment $ ($25 minimum) Level Payment $ ($25 minimum)
-------- --------
Variable Payment based on fixed number Variable Payment based on fixed number
of shares or a percentage of account of shares or a percentage of account
value ($25 minimum) value ($25 minimum)
Number of shares: or Number of shares: or
----------- -----------
Percentage of account value: Percentage of account value:
--------- ---------
Note: For Class B shares, annual withdrawals in excess of 10% of value of
account at time program is established may be subject to a contingent deferred
sales charge.
Complete this section only if you want check payable and sent to another address
(please print):
Name Signature(s) of all registered owners required
----------------------------
Address Individual Signature
------------------------- -------------------------
City, State, Zip Code Joint Owner Signature
------------ ------------------------
6. SECUR-O-MATIC[Registration Mark] BANK DRAFT PLAN
I wish to make investments directly from my checking account. (Please attach a
voided check to this application.)
Fund Name Account Number (if known) Amount $
------------------ ------- -------
Fund Name Account Number (if known) Amount $
------------------ ------- -------
Date: [ ] 7th Day of Month [ ] 14th Day of Month [ ] 21st Day of Month
[ ] 28th Day of Month
(if no date is selected investment will be made on the 21st)
Mode: [] Monthly ($20 minimum) [] Bi-Monthly ($40 minimum)
[] Quarterly ($50 minimum) [] Semiannually ($100 minimum)
[] Annually ($200 minimum)
You should notify your bank that you are going to use this service to ensure
they accept preauthorized electronic drafts.
(continued on back)
<PAGE>
7. RIGHTS OF ACCUMULATION
I own shares in other Security Funds which may entitle this purchase to have a
reduced sales charge under the provisions in the Fund Prospectus.
- -------------------------------- --------------------------- -----------------
Current Account Registration Fund Name Account Number(s)
- -------------------------------- --------------------------- -----------------
- -------------------------------- --------------------------- -----------------
8. STATEMENT OF INTENTION
[ ] Please check here if you wish to receive a Statement of Intention. This form
allows you to purchase shares at reduced sales charges if you plan to invest
more than: (Please check one) [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000
[ ] $1,000,000 in installments during the next 13 months (36 months for
purchases of $1 million or more). See the current prospectus for more
information.
9. TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGE
If you would like to have telephone exchange and/or redemption privileges,
please mark one or more of the boxes below:
Yes, I want [ ] telephone exchange [ ] telephone redemption privileges.
By checking the applicable box(es) and signing this Application, you authorize
the Investment Manager to honor any telephone request for the exchange and/or
redemption of Fund shares (maximum telephone redemption is $10,000), subject to
the terms of the Fund prospectus. The Investment Manager has established
reasonable procedures to confirm that instructions communicated by telephone are
genuine and may be liable for any losses due to fraudulent or unauthorized
instructions if it fails to comply with its procedures. The procedures require
that any person requesting a telephone redemption or exchange provide the
account registration and number and owner's tax identification number and such
request must be received on a recorded line. Neither the Fund, the Investment
Manager nor the Underwriter will be liable for any loss, liability, cost or
expense arising out of any telephone request, provided that the Investment
Manager complied with its procedures. Thus, a stockholder may bear the risk of
loss from a fraudulent or unauthorized request.
10. CERTIFICATION AND SIGNATURE
TAX IDENTIFICATION NUMBER CERTIFICATION
UNDER PENALTIES OF PERJURY I CERTIFY THAT:
1. The number shown on this form is my correct taxpayer identification number
(or I am waiting for a number to be issued to me); and
2. I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service
(IRS) that I am subject to backup withholding as a result of a failure to
report all interest or dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- --------------------------------------------------------------------------------
Signature of Owner Date
- --------------------------------------------------------------------------------
Signature of Joint Owner Date
In case of joint ownership, both must sign. If no form of ownership is indicated
then it will be assumed the ownership is as "joint tenants, with right of
survivorship" and not as "tenants in common."
CERTIFICATION INSTRUCTIONS - You must cross out item (2) to the left if you have
been notified by IRS that you are currently subject to backup withholding
because of underreporting interest or dividends on your tax return.
11. INVESTMENT DEALER
I (we) agree to act as dealer under this account in accordance with the
provisions of the Dealer Agreement and appoint Security Distributors, Inc. to
act as my (our) agent pursuant thereto. I (we) represent that the appropriate
prospectus was delivered to the above indicated owner(s).
- --------------------------------------------------------------------------------
Name of Firm (Print)
- --------------------------------------------------------------------------------
Business Address
- --------------------------------------------------------------------------------
City, State, Zip Code
- --------------------------------------------------------------------------------
Signature of Authorized Dealer
- ----------------------------------------------------- ------------------------
Representative's Name Account Executive Number
- --------------------------------------------------------------------------------
Business Address
- --------------------------------------------------------------------------------
City, State, Zip Code
- --------------------------------------------------------------------------------
Representative's Telephone Number
SEND COMPLETED APPLICATION TO SECURITY DISTRIBUTORS, INC., 700 SW HARRISON ST.,
TOPEKA, KS 66636-0001
1-800-888-2461, EXT. 3127
Attach Voided Check Here
(Check must be preprinted with the bank account registration)
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY
<PAGE>
PROSPECTUS
================================================================================
o MFR EMERGING MARKETS TOTAL RETURN SERIES
o MFR GLOBAL ASSET ALLOCATION SERIES PROSPECTUS
o MFR GLOBAL HIGH YIELD SERIES MAY 1, 1997
700 SW HARRISON STREET
TOPEKA, KS 66636-0001
MFR Emerging Markets Total Return Series, MFR Global Asset Allocation
Series and MFR Global High Yield Series (formerly Global Aggressive Bond Series)
are diversified series of an open-end management investment company. Each series
has its own identified assets, net asset values and investment objective.
The investment objective of the Emerging Markets Total Return Series is to
maximize total return. To achieve this goal, the Series invests in a combination
of equity and/or debt securities of companies domiciled in, or doing business
in, emerging countries and emerging markets and sovereign debt securities of
emerging market countries
The investment objective of the Global Asset Allocation Series is to seek a
high level of total return consisting of capital appreciation and current
income. To achieve its investment objective the Series follows an asset
allocation strategy that contemplates shifts among a wide range of investment
categories and market sectors, including equity and debt securities of domestic
and foreign issuers.
The investment objective of the Global High Yield Series is to seek high
current income with capital appreciation as a secondary objective through
investment primarily in a combination of foreign and domestic high yield, lower
rated securities.
EACH OF THE SERIES MAY INVEST IN DEBT SECURITIES THAT INCLUDE DOMESTIC AND
FOREIGN DEBT SECURITIES RATED BELOW INVESTMENT GRADE AND FOREIGN DEBT SECURITIES
WHOSE CREDIT QUALITY IS GENERALLY CONSIDERED THE EQUIVALENT OF SUCH SECURITIES,
WHICH ARE COMMONLY KNOWN AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT
TO A GREATER RISK OF LOSS OF PRINCIPAL AND INTEREST, INCLUDING THE RISK OF
DEFAULT, AND THEREFORE SHOULD BE CONSIDERED SPECULATIVE. SEE "INVESTMENT METHODS
AND RISK FACTORS" ON PAGE 12. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS
ASSOCIATED WITH INVESTING IN THE SERIES.
This Prospectus sets forth concisely the information that a prospective
investor should know about the Series. It should be read and retained for future
reference. Certain additional information is contained in a Statement of
Additional Information about the Series, dated May 1, 1997, which has been filed
with the Securities and Exchange Commission. The Statement of Additional
Information, as it may be supplemented from time to time, is incorporated by
reference in this Prospectus. It is available at no charge by writing Security
Distributors, Inc., 700 Harrison Street, Topeka, Kansas 66636-0001, or by
calling (800) 643-8188.
- --------------------------------------------------------------------------------
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission, nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
An investment in the Fund involves risk, including loss of principal, and
is not a deposit or obligation of or guaranteed by any bank. The Funds are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other agency.
- --------------------------------------------------------------------------------
<PAGE>
CONTENTS
================================================================================
Page
Transaction and Operating Expense Table.................................... 1
Financial Highlights................................................. ..... 2
Investment Objective and Policies of the Series............................ 3
MFR Emerging Markets Total Return Series......................... .... 3
MFR Global Asset Allocation Series.................................... 6
MFR Global High Yield Series.......................................... 9
Investment Methods and Risk Factors........................................ 12
Management of the Series................................................... 27
Portfolio Management.................................................. 28
How to Purchase Shares..................................................... 29
Alternative Purchase Options.......................................... 30
Class A Shares........................................................ 30
Class A Distribution Plan............................................. 31
Class B Shares................................................... .... 32
Class B Distribution Plan............................................. 32
Calculation and Waiver of Contingent Deferred Sales Charges....... ... 33
Arrangements with Broker-Dealers and Others........................... 34
Purchases at Net Asset Value........................................... .. 34
Trading Practices and Brokerage............................................ 35
How to Redeem Shares....................................................... 35
Telephone Redemptions ................................................ 36
Dividends and Taxes........................................................ 37
Foreign Taxes......................................................... 38
Determination of Net Asset Value........................................... 38
Performance................................................................ 39
Stockholder Services....................................................... 39
Accumulation Plan..................................................... 39
Systematic Withdrawal Program....................................... 40
Exchange Privilege.................................................... 40
Exchange by Telephone................................................. 41
Retirement Plans...................................................... 41
General Information........................................................ 41
Organization........................................................... 41
Stockholder Inquiries................................................. 42
Appendix A................................................................. 43
Appendix B................................................................. 45
<PAGE>
PROSPECTUS
================================================================================
TRANSACTION AND OPERATING EXPENSE TABLE
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B(1)
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) 4.75% None
Maximum Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load (as a percentage of original purchase price
or redemption proceeds, whichever is lower) None(2) 5% during the first year,
decreasing to 0% in the
sixth and following years
</TABLE>
<TABLE>
<CAPTION>
MFR EMERGING
MARKETS TOTAL MFR GLOBAL MFR GLOBAL
RETURN ASSET ALLOCATION HIGH YIELD
<S> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- -------
Management Fees 1.00% 1.00% 1.00% 1.00% 0.75% 0.75%
12b-1 Fees(3) 0.25% 1.00% 0.25% 1.00% 0.25% 1.00%
Other Expenses (after expense 0.75% 0.75% 0.75% 0.75% 1.00% 1.00%
reimbursements)(4) ----- ----- ----- ----- ----- -----
Total Fund Operating Expenses(5) 2.00% 2.75% 2.00% 2.75% 2.00% 2.75%
===== ===== ===== ===== ===== =====
EXAMPLE
You would pay the following expenses on 1 Year $ 67 $ 78 $ 67 $ 78 $ 67 $ 78
a $1,000 investment, assuming 3 Years 107 115 107 115 107 115
(1) 5 percent annual return and 5 Years --- --- --- --- 150 165
(2) redemption at the end of each time 10 Years --- --- --- --- 269 308
period
EXAMPLE
You would pay the following expenses on 1 Year $ 67 $ 28 $ 67 $ 28 $ 67 $ 28
a $1,000 investment, assuming 3 Years 107 85 107 85 107 85
(1) 5 percent annual return and (2) no 5 Years --- --- --- --- 150 145
redemption 10 Years --- --- --- --- 269 308
</TABLE>
1 Class B shares convert tax-free to Class A shares automatically after eight
years.
2 Purchases of Class A shares in amounts of $1,000,000 or more are not subject
to an initial sales load; however, a contingent deferred sales charge of 1%
is imposed in the event of redemption within one year of purchase. See "Class
A Shares" on page 30.
3 Long-term holders of shares that are subject to an asset-based sales charge
may pay more than the equivalent of the maximum front-end sales charge
otherwise permitted by NASD Rules.
4 The amount of "Other Expenses" of the Emerging Markets Total Return and
Global Asset Allocation Series is based on estimated amounts for the fiscal
year ending December 31, 1997.
5 During the fiscal year ending December 31, 1997, MFR will reimburse certain
expenses of each Series; absent such reimbursement and waiver, "Other
Expenses" would be as follows: 5.50% for Class A and Class B shares of
Emerging Markets Total Return; 5.50% for Class A and Class B shares of Global
Asset Allocation; and 1.73% for Class A shares and 2.00% for Class B shares
of Global High Yield Series.
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AS ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE
ASSUMED FIVE PERCENT ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED
A REPRESENTATION OF PAST OR FUTURE ANNUAL RETURN. THE ACTUAL RETURN MAY BE
GREATER OR LESSER THAN THE ASSUMED AMOUNT.
The purpose of the foregoing fee table is to assist the investor in
understanding the various costs and expenses that an investor in the Series will
bear directly or indirectly. For a more detailed discussion of the Series' fees
and expenses, see the discussion under "Management of the Series," page 27.
Information on the Series' 12b-1 Plans may be found under the headings "Class A
Distribution Plan" on page 31 and "Class B Distribution Plan" on page 32. See
"How to Purchase Shares," page 29, for more information concerning the sales
load. Also, see Appendix B for a discussion of "Rights of Accumulation" and
"Statement of Intention," which options may serve to reduce the front-end sales
load on purchases of Class A Shares.
- --------------------------------------------------------------------------------
1
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
The following financial highlights for each of the years in the period ended
December 31, 1996, have been audited by Ernst & Young LLP. Such information for
each of the years in the period ended December 31, 1996, should be read in
conjunction with the financial statements of the Series and the report of Ernst
& Young LLP, the Series' independent auditors, appearing in the December 31,
1996 Annual Report which is incorporated by reference in this Prospectus. The
Annual Report also contains additional information about the performance of the
Global High Yield Series and may be obtained without charge by calling Security
Distributors, Inc. at 1-800-643-8188. Financial information is not yet available
for the Emerging Markets Total Return and Global Asset Allocation Series as
these series did not begin operations until May 1, 1997.
<TABLE>
<CAPTION>
Net
gains Ratio
Net (losses) Divi- of Ratio
asset on sec- Total dends Net expenses of net
value urities from (from Distri- Net assets to income Port-
begin- Net (real- invest- net butions Return asset end of aver- to folio
Fiscal ning invest- ized & ment invest- (from of Total value Total period age average turn-
year of ment unreal- opera- ment capital capi- distri- end of return (thou- net net over
end period income ized) tions income) gains) tal butions period (a) sands) assets assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
GLOBAL HIGH YIELD SERIES (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $10.00 $ .63 $.09 $ .72 $(.55) $(.02) $--- $(.57) $10.15 7.3% $2,968 2.00% 11.04% 127%
(b)(c)(d)
1996 10.15 1.06 .064 1.124 (.687) (.227) --- (.914) 10.36 11.6% 3,507 1.98% 10.39% 96%
(b)(c)
GLOBAL HIGH YIELD SERIES (CLASS B)
1995 $10.00 $ .56 $.12 $ .68 $(.49) $(.02) $--- $(.51) $10.17 6.9% $1,440 2.75% 10.24% 127%
(b)(c)(d)
1996 10.17 .98 .06 1.04 (.573) (.227) --- (.80) 10.41 10.7% 1,541 2.75% 9.64% 96%
(b)(c)
</TABLE>
(a) Total return information does not reflect deduction of any sales charge
imposed at the time of purchase for Class A shares or upon redemption for
Class B shares.
(b) Fund expenses were reduced by the Investment Manager during the period, and
expense ratios absent such reimbursement would have been as follows:
1995 1996
Global High Yield Class A 2.42% 2.73%
Class B 3.93% 3.75%
(c) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(d) Global High Yield Series (formerly referred to as Global Aggressive Bond
Series) was initially capitalized on June 1, 1995, with a net asset value
of $10 per share. Percentage amounts for the period have been annualized,
except for total return.
See accompanying notes.
2
<PAGE>
PROSPECTUS
================================================================================
INVESTMENT OBJECTIVES AND POLICIES OF THE SERIES
MFR Emerging Markets Total Return Series, MFR Global Asset Allocation
Series and MFR Global High Yield Series (the "Series") are diversified series of
an open-end management investment company (commonly known as a mutual fund),
Security Income Fund (the "Fund"). The Fund was organized as a Kansas
corporation on September 9, 1970. Each of the Series has its own investment
objective and policies which are discussed in more detail below. Although the
Emerging Markets Total Return Series and Global Asset Allocation Series are
series of Security Income Fund, each series may invest to a substantial degree
in equity securities as discussed below. There, of course, can be no assurance
that the Series will achieve their investment objectives. While there is no
present intention to do so, the investment objective and policies of each Series
may be changed by the Board of Directors of the Fund without the approval of
stockholders. If a change in investment objective is made, stockholders should
consider whether the Series remains an appropriate investment in light of their
then current financial position and needs.
Each of the Series is subject to certain investment policy limitations,
which may not be changed without stockholder approval. Among these limitations,
some of the more important ones are: (1) with respect to 75 percent of the value
of its total assets, no Series will invest more than 5 percent of the value of
its assets in any one issuer other than the U.S. Government or its
instrumentalities; (2) no Series will purchase more than 10 percent of the
outstanding voting securities of any one issuer; nor (3) invest 25 percent or
more of its total assets in any one industry. The full text of the investment
policy limitations of each Series is set forth in the Series' Statement of
Additional Information.
Each of the Series may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. See "Investment Methods
and Risk Factors" for a discussion of borrowing. Pending investment in
securities or to meet potential redemptions, each of the Series may invest in
certificates of deposit, bank demand accounts, repurchase agreements and high
quality money market instruments.
MFR EMERGING MARKETS TOTAL RETURN SERIES
The investment objective of MFR Emerging Markets Total Return Series is to
seek to maximize total return. The Series under normal circumstances invests
substantially all of its assets in a portfolio of emerging country and emerging
market equity and debt securities. Equity securities will consist of all types
of common stocks and equivalents (the following constitute equivalents:
convertible debt securities and warrants). The Series also may invest in
preferred stocks, bonds, money market instruments of foreign and domestic
companies, U.S. government, and governmental agencies and debt securities of
sovereign emerging market issuers. The Series may invest up to 100 percent of
its total assets in U.S. and foreign debt securities and other fixed income
securities that, at the time of purchase, are rated below investment grade
("high yield securities" or "junk bonds"), which involve a high degree of risk
and are predominantly speculative. The Series also may invest in zero coupon
securities and securities that are in default
- --------------------------------------------------------------------------------
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus and in the Statement of Additional Information in connection with the
offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund, the Investment Manager, or the Distributor.
- --------------------------------------------------------------------------------
3
<PAGE>
PROSPECTUS
================================================================================
as to payment of principal and/or interest. A description of certain debt
ratings is included as Appendix A to this Prospectus. See "Investment Methods
and Risk Factors" for a discussion of the risks associated with investing in
junk bonds and zero coupon securities. Many emerging market debt securities are
not rated by United States rating agencies such as Moody's and Standard &
Poor's. The Series' ability to achieve its investment objective is thus more
dependent on the credit analysis of MFR Advisors, Inc. ("MFR") than would be the
case if the Series were to invest in higher quality bonds. The Series may invest
in fixed income securities without limitation as to maturity. INVESTORS SHOULD
PURCHASE SHARES ONLY AS A SUPPLEMENT TO AN OVERALL INVESTMENT PROGRAM AND ONLY
IF WILLING TO UNDERTAKE THE RISKS INVOLVED.
"Emerging markets" will consist of all countries determined by the World
Bank or the United Nations to have developing or emerging economies and markets.
These countries are generally expected to include every country in the world
except the United States, Canada, Japan, Australia, New Zealand and most
countries in Western Europe.
Currently, investing in many of the emerging countries and emerging markets
is not feasible. Accordingly, MFR currently intends to consider investments only
in those countries in which it believes investing is feasible. The list of
acceptable countries will be reviewed by MFR and approved by the Board of
Directors on a periodic basis and any additions or deletions with respect to
such list will be made in accordance with changing economic and political
circumstances involving such countries.
An issuer in an emerging market is an entity: (i) for which the principal
securities trading market is an emerging market, as defined above; (ii) that
(alone or on a consolidated basis) derives 50 percent or more of its total
revenue from either goods produced, sales made or services performed in emerging
markets; or (iii) organized under the laws of, and with a principal office in,
an emerging market.
The Series' investments in emerging country securities are not subject to
any maximum limit, and it is the intention of MFR to invest substantially all of
the Series' assets in emerging country and emerging market securities. However,
to the extent that the Series' assets are not invested in emerging country and
emerging market securities, the remaining 35 percent of the assets may be
invested in (i) other equity and debt securities without regard to whether they
qualify as emerging country or emerging market securities, and (ii) cash
reserves of the type described under "Investment Methods and Risk Factors." In
addition, for temporary defensive purposes, the Series may invest less than 65
percent of its assets in emerging country and emerging market securities, in
which case the Series may invest in other equity or debt securities or may
invest in cash reserves without limitation.
The Series' investments in emerging market debt securities consist
substantially of high yield, lower-rated debt securities of foreign
corporations, and "Brady Bonds" and other sovereign debt securities issued by
emerging market governments. "Sovereign debt securities" are those issued by
emerging market governments that are traded in the markets of developed
countries or groups of developed countries. MFR may invest in debt securities of
emerging market issuers that it determines to be suitable investments for the
Series without regard to ratings. Currently, the substantial majority of
emerging market debt securities are considered to have a credit quality below
investment grade. The Series may invest up to 100 percent of its total assets in
debt securities with credit quality below investment grade (known as junk
bonds). Such securities are predominantly speculative and involve a high degree
of risk as discussed under "Investment Methods and Risk Factors." The
- --------------------------------------------------------------------------------
4
<PAGE>
PROSPECTUS
================================================================================
Series may invest in bank loan participations and assignments, which are fixed
and floating rate loans arranged through private negotiations between foreign or
domestic entities.
The Series invests in securities allocated among diverse markets and
denominated in various currencies, including U.S. dollars, or in multinational
currency units such as European Currency Units. The Series may purchase
securities that are issued by the government or a company or financial
institution of one country but denominated in the currency of another country
(or a multinational currency unit). The Series is designed for investors who
wish to accept the risks entailed in such investments, which are different from
those associated with a portfolio consisting entirely of securities of U.S.
issuers denominated in U.S. dollars. See the discussion of such risks, including
currency risk, under "Investment Methods and Risk Factors."
MFR selectively will allocate the assets of the Series in securities of
issuers in countries and in currency denominations where the combination of
market returns, the price appreciation potential of securities and currency
exchange rate movements will present opportunities for maximum total return. In
so doing, MFR intends to take advantage of the different yield, risk and return
characteristics that investment in the security markets of different countries
can provide for U.S. investors. Fundamental economic strength, credit quality,
earnings growth potential and currency and market trends will be the principal
determinants of the emphasis given to various country, geographic and industry
sectors within the Series.
MFR evaluates currencies on the basis of fundamental economic criteria
(e.g., relative inflation and interest rate levels and trends, growth rate
forecasts, balance of payments status and economic policies) as well as
technical and political data. If the currency in which a security is denominated
appreciates against the U.S. dollar, the dollar value of the security will
increase. Conversely, if the exchange rate of the foreign currency declines, the
dollar value of the security will decrease. However, the Series may seek to
protect itself against such negative currency movements through the use of
sophisticated investment techniques. See the discussion of forward currency
transactions, options and futures under "Investment Methods and Risk Factors."
Futures may be used to gain exposure to markets where there is insufficient
cash to purchase a diversified portfolio of securities. Currencies may be held
to gain exposure to an international market prior to investing in a non-dollar
security.
The Series may enter into futures contracts (a type of derivative)(or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or as
an efficient means of adjusting its exposure to the bond, stock, and currency
markets. The Series will not use futures contracts for leveraging purposes. The
Series will limit its use of futures contracts so that initial margin deposits
or premiums on such contracts used for non-hedging purposes will not equal more
than 5 percent of the Series' net asset value. The Series may also write call
and put options on a covered basis and purchase put and call options on
securities, financial indices, and currencies. The aggregate market value of the
Series' portfolio securities or currencies covering call or put options will not
exceed 25 percent of the Series' net assets. The Series may enter into foreign
futures and options transactions. See the discussion of options and futures
contracts under "Investment Methods and Risk Factors." As part of its investment
program and to maintain greater flexibility, the Series may invest in
instruments which have the characteristics of futures, options and securities,
known as "hybrid instruments." For a discussion of such instruments and the
risks
- --------------------------------------------------------------------------------
5
<PAGE>
PROSPECTUS
================================================================================
involved in investing therein, see "Investment Methods and Risk Factors."
The Series may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis in order to hedge
against anticipated changes in interest rates and prices. See the discussion of
when-issued and forward commitment securities under "Investment Methods and Risk
Factors." The Series may enter into repurchase agreements, reverse repurchase
agreements and "dollar rolls" which are discussed under "Investment Methods and
Risk Factors." The Series may also invest in restricted securities as discussed
under "Investment Methods and Risk Factors."
MFR GLOBAL ASSET ALLOCATION SERIES
The investment objective of MFR Global Asset Allocation Series is to seek a
high level of total return by investing primarily in a diversified portfolio of
fixed income and equity securities. The Series is designed to balance the
potential appreciation of common stocks with the income and relative stability
of principal of bonds over the long term. The primary consideration in changing
the asset allocation mix will be the fundamental economic outlook of the Series'
Adviser, MFR, for the different markets in which the Series invests. Shifts
between the fixed income and equity sectors will normally be done gradually and
MFR will not attempt to precisely "time" the market. There is, of course, no
guarantee that MFR's gradual approach to allocating the Series' assets will be
successful in achieving the Series' objective. The Series will maintain cash
reserves to facilitate the Series' cash flow needs (redemptions, expenses and
purchases of Series securities) and it may invest in cash reserves without
limitation for temporary defensive purposes. See the discussion of cash reserves
under "Investment Methods and Risk Factors."
Assets allocated to the fixed income portion of the Series will be invested
primarily in U.S. and foreign investment grade bonds, high yield bonds (U.S. and
foreign, including "Brady Bonds"), short-term investments and currencies, as
needed to gain exposure to foreign markets. Investment grade debt securities
include long, intermediate and short-term investment grade debt securities
(e.g., AAA, AA, A or BBB by S&P or if not rated, of equivalent investment
quality as determined by MFR). The weighted average maturity for this portion
(investment grade debt securities) of the Series' portfolio is generally
expected to be intermediate (3-10 years), although it may vary significantly.
Non-dollar debt securities include non-dollar denominated government and
corporate debt securities or currencies. See "Investment Methods and Risk
Factors" for a discussion of the risks involved in foreign investing. High-yield
securities include high-yielding, income-producing debt securities in the lower
rating categories (commonly referred to as "junk bonds") and preferred stocks
including convertible securities. High yield bonds may be purchased without
regard to maturity; however, the average maturity is expected to be
approximately 10 years, although it may vary if market conditions warrant.
Quality will generally range from lower medium to low and the Series may also
purchase bonds in default if, in the opinion of MFR, there is significant
potential for capital appreciation. Lower-rated debt obligations are generally
considered to be high risk investments. See "Investment Methods and Risk
Factors" for a discussion of the risks involved in investing in high-yield,
lower-rated debt securities. The Series may invest in zero coupon securities
that pay no interest prior to maturity and payment in kind securities that pay
interest in the form of additional securities. See the discussion of such
securities under "Investment Methods and Risk Factors." Securities which may be
held as cash reserves include liquid short-term investments of one year or less
rated within the top two categories by at least one establishd
- --------------------------------------------------------------------------------
6
<PAGE>
PROSPECTUS
================================================================================
rating organization, or if not rated, of equivalent investment quality as
determined by MFR. The Series may use currencies to gain exposure to an
international market prior to investing in non-dollar securities.
The Series' equity sector will be allocated among large and small capital
("Large Cap" and "Small Cap" respectively) U.S. and non-dollar equity
securities, currencies, real estate investment trusts ("REITs") and futures. See
the discussion of REITs under "Investment Methods and Risk Factors." Large Cap
securities generally include stocks of well established companies with
capitalization over $1 billion which can produce increasing dividend income.
Non-dollar securities include foreign currencies and common stocks of
established non-U.S. companies. Investments may be made solely for capital
appreciation or solely for income or any combination of both for the purpose of
achieving a higher overall return. MFR intends to diversify the non-dollar
portion of the Series' portfolio broadly among countries and normally to have at
least three different countries represented. The countries of the Far East and
Western Europe as well as South Africa, Australia, Canada, and other areas
(including developing countries) may be included. Under unusual circumstances,
however, investment may be substantially in one or two countries.
Futures may be used to gain exposure to equity markets where there is
insufficient cash to purchase a diversified portfolio of stocks. Currencies also
may be held to gain exposure to an international market prior to investing in a
non-dollar stock.
Small Cap securities include common stocks of small companies or companies
which offer the possibility of accelerated earnings growth because of
rejuvenated management, new products or structural changes in the economy.
Current income is not a factor in the selection of these stocks. Higher risks
are often associated with small companies. These companies may have limited
product lines, markets and financial resources, or they may be dependent on a
small or inexperienced management group. In addition, their securities may trade
less frequently and in limited volume and move more abruptly than securities of
larger companies. However, securities of smaller companies may offer greater
potential for capital appreciation since they are often overlooked or
undervalued by investors.
Until the Series reaches approximately $20 million in assets, the Series
may be unable to prudently achieve diversification among the described asset
classes. During this initial period, the Series may use futures contracts and
purchase foreign currencies to a greater extent than it will once the start-up
period is over. See "Investment Methods and Risk Factors."
Some of the countries in which the Series may invest may be considered to
be developing and may involve special risks. For a discussion of the risks
involved in investment in foreign securities, including investment in emerging
markets, see "Investment Methods and Risk Factors." The Series' foreign
investments are also subject to currency risk described under "Investment
Methods and Risk Factors". To manage this risk and facilitate the purchase and
sale of foreign securities, the Series may engage in foreign currency
transactions involving the purchase and sale of forward foreign currency
exchange contracts. Although forward currency transactions will be used
primarily to protect the Series from adverse currency movements, they also
involve the risk that anticipated currency movements will not be accurately
predicted and the Series' total return could be adversely affected as a result.
For a discussion of forward currency transactions and the risks associated with
such transactions, see "Investment Methods and Risk Factors." Purchases by the
Series of currencies in substitution of purchases of stocks and bonds will
subject the Series to risks different from a fund invested solely in stocks and
bonds.
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The Series' investments include, but are not limited to, equity and fixed
income securities of any type and the Series may utilize the investment methods
and investment vehicles described below.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or as
an efficient means of adjusting its exposure to the bond, stock, and currency
markets. The Series will not use futures contracts for leveraging purposes. The
Series will limit its use of futures contracts so that initial margin deposits
or premiums on such contracts used for non-hedging purposes will not equal more
than 5 percent of the Series' net asset value. The Series may also write call
and put options on a covered basis and purchase put and call options on
securities, financial indices, and currencies. The aggregate market value of the
Series' portfolio securities or currencies covering call or put options will not
exceed 25 percent of the Series' net assets. The Series may enter into foreign
futures and options transactions. See the discussion of options and futures
contracts under "Investment Methods and Risk Factors." As part of its investment
program and to maintain greater flexibility, the Series may invest in
instruments which have the characteristics of futures, options and securities,
known as "hybrid instruments." For a discussion of such instruments and the
risks involved in investing therein, see "Investment Methods and Risk Factors."
The Series may acquire illiquid securities in an amount not exceeding 15
percent of net assets. Because an active trading market does not exist for such
securities the sale of such securities may be subject to delay and additional
costs. The Series will not invest more than 15 percent of its total assets in
restricted securities (other than securities eligible for resale under Rule 144A
of the Securities Act of 1933). For a discussion of restricted securities, see
"Investment Methods and Risk Factors."
The Series may invest in asset-backed securities, which securities involve
certain risks. For a discussion of asset-backed securities and the risks
involved in investment in such securities, see the discussion under "Investment
Methods and Risk Factors." The Series may invest in mortgage-backed securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
or institutions such as banks, insurance companies and savings and loans. Some
of these securities, such as GNMA certificates, are backed by the full faith and
credit of the U.S. Treasury while others, such as Freddie Mac certificates, are
not. The Series also may invest in collateralized mortgage obligations (CMOs)
and stripped mortgage securities (a type of derivative). Stripped mortgage
securities are created by separating the interest and principal payments
generated by a pool of mortgage-backed bonds to create two classes of
securities, "interest only" (IO) and "principal only" (PO) bonds. There are
risks involved in mortgage-backed securities, CMOs and stripped mortgage
securities. See "Investment Methods and Risk Factors" for an additional
discussion of such securities and the risks involved therein.
While the Series will remain invested in primarily common stocks and bonds,
it may, for temporary defensive purposes, invest in cash reserves without
limitation. The Series may establish and maintain reserves as MFR believes is
advisable to facilitate the Series' cash flow needs. Cash reserves include money
market instruments, including repurchase agreements, in the two highest rating
categories. Short-term securities may be held in the equity sector as collateral
for futures contracts. These securities are segregated and may not be available
for the Series' cash flow needs.
The Series may invest in debt or preferred equity securities convertible
into or exchangeable for equity securities and warrants. As a
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fundamental policy, for the purpose of realizing additional income, the Series
may lend securities with a value of up to 33 1/3 percent of its total assets to
broker-dealers, institutional investors, or other persons. Any such loan will be
continuously secured by collateral at least equal to the value of the securities
loaned. For a discussion of the limitations on lending and risks of lending, see
"Investment Methods and Risk Factors."
The Series may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis as discussed under
"Investment Methods and Risk Factors." The Series may enter into repurchase
agreements, reverse repurchase agreements, and "dollar rolls" also as discussed
under "Investment Methods and Risk Factors."
MFR GLOBAL HIGH YIELD SERIES
The MFR Global High Yield Series seeks to provide high current income.
Capital appreciation is a secondary objective. As used herein the term "bond" is
used to describe any type of debt security. Under normal circumstances the
Series will invest at least 65 percent of its total assets in high yield bonds
as discussed herein. High yield bonds consist of debt securities rated below
investment grade ("junk bonds") and other debt securities that yield in excess
of investment grade debt securities. The Series under normal circumstances seeks
its investment objective of providing a high level of current income by
investing substantially all of its assets in a portfolio of debt securities of
issuers in three separate investment areas: (i) the United States; (ii)
developed foreign countries; and (iii) emerging markets. The Series also may
invest up to 50 percent of its assets in certain derivative instruments. See
"Investment Methods and Risk Factors" for a discussion of the risks associated
with investing in derivative instruments. The Series selects particular debt
securities in each sector based on their relative investment merits. Within each
area, the Series selects debt securities from those issued by governments, their
agencies and instrumentalities; central banks; commercial banks and other
corporate entities. Debt securities in which the Series may invest consist of
bonds, notes, debentures and other similar instruments. The Series may invest up
to 100 percent of its total assets in U.S. and foreign debt securities and other
fixed income securities that, at the time of purchase, are rated below
investment grade ("high yield securities" or "junk bonds"), which involve a high
degree of risk and are predominantly speculative. The Series may also invest in
securities that are in default as to payment of principal and/or interest. A
description of debt ratings is included as Appendix A to this Prospectus. See
"Investment Methods and Risk Factors" for a discussion of the risks associated
with investing in junk bonds. Many emerging market debt securities are not rated
by United States rating agencies such as Moody's and S&P. The Series' ability to
achieve its investment objectives is thus more dependent on MFR's credit
analysis than would be the case if the Series were to invest in higher quality
bonds. INVESTORS SHOULD PURCHASE SHARES ONLY AS A SUPPLEMENT TO AN OVERALL
INVESTMENT PROGRAM AND ONLY IF WILLING TO UNDERTAKE THE RISKS INVOLVED.
For the year ended December 31, 1996, the dollar weighted average of Global
High Yield Series' holdings (excluding equities) had the following credit
quality characteristics.
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PERCENT OF
INVESTMENT NET ASSETS
U.S. Government and
Government Agency Securities............ 0%
Cash and other Assets, Less Liabilities.... 2.8%
Rated Fixed Income Securities
AAA..................................... 12.9%
AA...................................... 6.5%
A....................................... 18.5%
Baa/BBB................................. 23.7%
Ba/BB................................... 16.1%
B....................................... 19.5%
Caa/CCC................................. 0%
Unrated Securities Comparable in Quality to
A....................................... 0%
Baa/BBB................................. 0%
Ba/BB................................... 0%
B....................................... 0%
Caa/CCC................................. 0%
----
100%
The foregoing table is intended solely to provide disclosure about Global High
Yield Series' asset composition for the year ended December 31, 1996. The asset
composition after this may or may not be approximately the same as shown above.
EMERGING MARKETS. "Emerging markets" will consist of all countries
determined by the World Bank or the United Nations to have developing or
emerging economies and markets. Currently, investing in many of the emerging
countries and emerging markets is not feasible. Accordingly, MFR currently
intends to consider investments only in those countries in which it believes
investing is feasible. The list of acceptable countries will be reviewed by MFR
and approved by the Board of Directors on a periodic basis and any additions or
deletions with respect to such list will be made in accordance with changing
economic and political circumstances involving such countries. An issuer in an
emerging market is an entity: (i) for which the principal securities trading
market is an emerging market, as defined above; (ii) that (alone or on a
consolidated basis) derives 50 percent or more of its total revenue from either
goods produced, sales made or services performed in emerging markets; or (iii)
organized under the laws of, and with a principal office in, an emerging market.
The Series' investments in emerging market securities consist substantially
of high yield, lower-rated debt securities of foreign corporations and "Brady
Bonds" and other sovereign debt securities issued by emerging market
governments. The Series may invest in debt securities of emerging market issuers
without regard to ratings. Currently, the substantial majority of emerging
market debt securities are considered to have a credit quality below investment
grade. The Series may invest in bank loan participations and assignments, which
are fixed and floating rate loans arranged through private negotiations between
foreign entities. The Series may also invest up to 5 percent of its total assets
in zero coupon securities. See the discussion of sovereign debt securities,
Brady Bonds, loan participations and assignments and zero coupon securities
under "Investment Methods and Risk Factors."
TEMPORARY INVESTMENTS. The Series intends to retain the flexibility to
respond promptly to changes in market and economic conditions. Accordingly, in
the interest of preserving shareholders' capital and consistent with the Series'
investment objectives, MFR may employ a temporary defensive investment strategy
if it determines such a strategy to be warranted. Pursuant to such a defensive
strategy, the Series temporarily may hold cash (U.S. dollars, foreign currencies
or multinational currency units) and/or invest up to 100 percent of its assets
in high quality debt securities or money market instruments of U.S. or foreign
issuers, and most or all of the Fund's investments may be made in the United
States and denominated in U.S. dollars. For debt obligations other than
commercial paper,
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this includes securities rated, at the time of purchase, at least AA by S&P or
Aa by Moody's, or if unrated, determined to be of comparable quality by MFR. For
commercial paper, this includes securities rated, at the time of purchase, at
least A-2 by S&P or Prime-2 by Moody's, or if unrated, determined to be of
comparable quality by MFR. It is impossible to predict whether, when or for how
long the Series will employ defensive strategies. To the extent the Fund adopts
a temporary defensive investment posture, it will not be invested so as to
achieve directly its investment objectives. In addition, pending investment of
proceeds from new sales of Fund shares or to meet ordinary daily cash needs, the
Fund temporarily may hold cash (U.S. dollars, foreign currencies or
multinational currency units) and may invest any portion of its assets in high
quality foreign or domestic money market instruments.
INVESTMENT TECHNIQUE. The Series invests in debt obligations allocated
among diverse markets and denominated in various currencies, including U.S.
dollars, or in multinational currency units such as European Currency Units. The
Series may purchase securities that are issued by the government or a company or
financial institution of one country but denominated in the currency of another
country (or a multinational currency unit). The Series is designed for investors
who wish to accept the risks entailed in such investments, which are different
from those associated with a portfolio consisting entirely of securities of U.S.
issuers denominated in U.S. dollars. See "Investment Methods and Risk Factors"
for a discussion of the risks associated with securities denominated in foreign
currencies.
MFR will seek to allocate the assets of the Series in securities of issuers
in countries and in currency denominations where the combination of fixed income
market returns, the price appreciation potential of fixed income securities and
currency exchange rate movements will present opportunities primarily for high
current income and secondarily for capital appreciation. In so doing, MFR
intends to take full advantage of the different yield, risk and return
characteristics that investment in the fixed income markets of different
countries can provide for U.S. investors. Fundamental economic strength, credit
quality and currency and interest rate trends will be the principal determinants
of the emphasis given to various country, geographic and industry sectors within
the Series. Securities held by the Series may be invested in without limitation
as to maturity.
MFR evaluates currencies on the basis of fundamental economic criteria
(e.g., relative inflation and interest rate levels and trends, growth rate
forecasts, balance of payments status and economic policies) as well as
technical and political data. If the currency in which a security is denominated
appreciates against the U.S. dollar, the dollar value of the security will
increase. Conversely, if the exchange rate of the foreign currency declines, the
dollar value of the security will decrease. The Series may seek to protect
itself against such negative currency movements through the use of sophisticated
investment techniques although the Series is not committed to using such
techniques and may be fully exposed to changes in currency exchange rates. See
"Investment Methods and Risk Factors" for a discussion of such techniques.
The Series may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis in order to hedge
against anticipated changes in interest rates and prices. See the discussion of
when-issued and forward commitment securities under "Investment Methods and Risk
Factors." The Series may enter into repurchase agreements, reverse repurchase
agreements and "dollar rolls" which are discussed under "Investment Methods and
Risk Factors." The Series may purchase
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restricted securities as discussed under "Investment Methods and Risk Factors."
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Series are described in the
"Investment Objectives and Policies" section of this Prospectus and in the
"Investment Objectives and Policies" and "Investment Policy Limitations"
sections of the Series' Statement of Additional Information. The following is a
description of certain additional risk factors related to various securities,
instruments and techniques. The risks so described only apply to those Series
which may invest in such securities and instruments or use such techniques. Also
included is a general description of some of the investment instruments,
techniques and methods which may be used by one or more of the Series. The
methods described only apply to those Series which may use such methods.
INVESTMENT VEHICLES
BAA OR BBB SECURITIES -- Each of the Series may invest in medium grade debt
securities (debt securities rated Baa by Moody's or BBB by S&P at the time of
purchase, or if unrated, of equivalent quality as determined by MFR). Baa
securities are considered to be "medium grade" obligations by Moody's and BBB is
the lowest classification which is still considered an "investment grade" rating
by S&P. Bonds rated Baa by Moody's or BBB by S&P have speculative
characteristics and may be more susceptible than higher grade bonds to adverse
economic conditions or other adverse circumstances which may result in a
weakened capacity to make principal and interest payments. Each Series also may
invest in higher yield debt securities in the lower rating (higher risk)
categories of the recognized rating services (commonly referred to as "junk
bonds"). See Appendix A to this Prospectus for a complete description of
corporate bond ratings and see "Risks Associated with Lower-Rated Debt
Securities (Junk Bonds)."
U.S. GOVERNMENT SECURITIES -- Each of the Series may invest in U.S.
Government securities which include obligations issued or guaranteed (as to
principal and interest) by the United States Government or its agencies (such as
the Small Business Administration, the Federal Housing Administration, and
Government National Mortgage Association), or instrumentalities (such as Federal
Home Loan Banks and Federal Land Banks), and instruments fully collateralized
with such obligations such as repurchase agreements. Some U.S. Government
securities, such as Treasury bills and bonds, are supported by the full faith
and credit of the U.S. Treasury; others are supported by the right of the issuer
to borrow from the Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. Government National Mortgage Association (GNMA) certificates
are mortgage-backed securities representing part ownership of a pool of mortgage
loans on which timely payment of interest and principal is guaranteed by the
full faith and credit of the U.S. Government. Although U.S. Government
securities are guaranteed by the U.S. Government, its agencies or
instrumentalities, shares of the Series are not so guaranteed in any way.
CONVERTIBLE SECURITIES AND WARRANTS -- The Emerging Markets Total Return
and Global Asset Allocation Series may invest in debt or preferred equity
securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than non-
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convertible securities. They generally participate in the appreciation or
depreciation of the underlying stock into which they are convertible, but to a
lesser degree. In recent years, convertibles have been developed which combine
higher or lower current income with options and other features. Warrants are
options to buy a stated number of shares of common stock at a specified price
any time during the life of the warrants (generally two or more years).
REAL ESTATE INVESTMENT TRUSTS (REITS) -- The Global Asset Allocation Series
may invest in REITs. A REIT is a trust that invests in a diversified portfolio
of real estate holdings. Investment in REITs involves certain special risks.
Equity REITs may be affected by any changes in the value of the underlying
property owned by the trusts, while mortgage REITs may be affected by the
quality of any credit extended. Further, equity and mortgage REITs are dependent
upon management skill, are not diversified, and are therefore subject to the
risk of financing single or a limited number of projects. Such trusts are also
subject to heavy cash flow dependency, defaults by borrowers, self liquidation,
and the possibility of failing to qualify for special tax treatment under
Subchapter M of the Internal Revenue Code and to maintain an exemption under the
Investment Company Act of 1940. Finally, certain REITs may be self-liquidating
in that a specific term of existence is provided for in the trust document. Such
trusts run the risk of liquidating at an economically inopportune time.
MORTGAGE BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS -- The
Global Asset Allocation Series may invest in mortgage-backed securities (MBSs),
including mortgage pass through securities and collateralized mortgage
obligations (CMOs). MBSs include certain securities issued or guaranteed by the
United States government or one of its agencies or instrumentalities, such as
the Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), or Federal Home Loan Mortgage Corporation (FHLMC);
securities issued by private issuers that represent an interest in or are
collateralized by mortgage-backed securities issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities; and securities issued by
private issuers that represent an interest in or are collateralized by mortgage
loans. A mortgage pass through security is a pro rata interest in a pool of
mortgages where the cash flow generated from the mortgage collateral is passed
through to the security holder. CMOs are obligations fully collateralized by a
portfolio of mortgages or mortgage-related securities.
The Global Asset Allocation Series may invest in securities known as
"inverse floating obligations," "residual interest bonds," and "interest only"
(IO) and "principal only" (PO) bonds, the market values of which will generally
be more volatile than the market values of most MBSs. An inverse floating
obligation is a derivative adjustable rate security with interest rates that
adjust or vary inversely to changes in market interest rates. The term "residual
interest" bond is used generally to describe those instruments in collateral
pools, such as CMOs, which receive any excess cash flow generated by the pool
once all other bondholders and expenses have been paid. IOs and POs are created
by separating the interest and principal payments generated by a pool of
mortgage-backed bonds to create two classes of securities. Generally, one class
receives interest only payments (IOs) and the other class principal only
payments (POs). MBSs have been referred to as "derivatives" because the
performance of MBSs is dependent upon and derived from underlying securities.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. PREPAYMENT RISK reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's
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average life and perhaps its yield. Borrowers are most likely to exercise their
prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others with
respect to the receipt of prepayments on the mortgages and the Global Asset
Allocation Series may invest in CMOs which are subject to greater risk of
prepayment. MARKET RISK reflects the chance that the price of the security may
fluctuate over time. The price of MBSs may be particularly sensitive to
prevailing interest rates, the length of time the security is expected to be
outstanding and the liquidity of the issue. In a period of unstable interest
rates, there may be decreased demand for certain types of MBSs, and a fund
invested in such securities wishing to sell them may find it difficult to find a
buyer, which may in turn decrease the price at which they may be sold. CREDIT
RISK reflects the chance that the Series may not receive all or part of its
principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. Government-related entities are
guaranteed by the agency or instrumentality, and some, such as GNMA
certificates, are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the FNMA, are supported by the discretionary authority
of the U.S. Government to purchase the agency's obligations; still others, are
supported only by the credit of the instrumentality. Although securities issued
by U.S. Government-related agencies are guaranteed by the U.S. Government, its
agencies or instrumentalities, shares of the Series are not so guaranteed in any
way. The performance of private label MBSs, issued by private institutions, is
based on the financial health of those institutions.
ASSET-BACKED SECURITIES -- The Global Asset Allocation Series may invest in
asset-backed securities which represent a participation in, or are secured by
and payable from, a stream of payments generated by particular assets, for
example, automobile, credit card or trade receivables. Asset-backed commercial
paper, one type of asset-backed security, is issued by a special purpose entity,
organized solely to issue the commercial paper and to purchase interests in the
assets. The credit quality of these securities depends primarily upon the
quality of the underlying assets and the level of credit support and/or
enhancement provided. The underlying assets (e.g., loans) are subject to
prepayments which shorten the securities' weighted average life and may lower
their return. If the credit support or enhancement is exhausted, losses or
delays in payment may result if the required payments of principal and interest
are not made. The value of these securities also may change because of changes
in the market's perception of the creditworthiness of the servicing agent for
the pool, the originator of the pool, or the financial institution providing the
credit support or enhancement. Asset-backed securities are subject to risks
similar to those discussed above with respect to MBSs.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES -- Each of the Series may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. The price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Series will enter
into when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be. No income accrues on
securities which have been purchased pursuant to a forward commitment or on a
when-
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issued basis prior to delivery of the securities. If a Series disposes of the
right to acquire a when-issued security prior to its acquisition or disposes of
its right to deliver or receive against a forward commitment, it may incur a
gain or loss. At the time a Series enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash or liquid
securities equal to the value of the when-issued or forward commitment
securities will be established and maintained with its custodian and will be
marked to market daily. There is a risk that the securities may not be delivered
and that the Series may incur a loss.
RESTRICTED SECURITIES (RULE 144A SECURITIES) -- Each of the Series may
invest in restricted securities which are securities that are restricted as to
disposition under the federal securities laws. The Series may acquire such
securities through private placement transactions, directly from the issuer or
from security holders, generally at higher yields or on terms more favorable to
investors than comparable publicly traded securities. However, the restrictions
on resale of such securities may make it difficult for the Series to dispose of
such securities at the time considered most advantageous, and/or may involve
expenses that would not be incurred in the sale of securities that were freely
marketable. Risks associated with restricted securities include the potential
obligation to pay all or part of the registration expenses in order to sell
certain restricted securities. A considerable period of time may elapse between
the time of the decision to sell a security and the time the Series may be
permitted to sell it under an effective registration statement. If, during a
period, adverse conditions were to develop, the Series might obtain a less
favorable price than prevailing when it decided to sell.
Trading restricted securities pursuant to Rule 144A may enable a Series to
dispose of restricted securities at a time considered to be advantageous and/or
at a more favorable price than would be available if such securities were not
traded pursuant to Rule 144A. However, the Rule 144A market is relatively new
and liquidity of a Series' investment in such market could be impaired if
trading does not develop or declines.
The Series' Board of Directors is responsible for developing and
establishing guidelines and procedures for determining the liquidity of Rule
144A securities. As permitted by Rule 144A, the Board of Directors has delegated
this responsibility to MFR. In making the determination regarding the liquidity
of Rule 144A securities, MFR will consider trading markets for the specific
security taking into account the unregistered nature of a Rule 144A security. In
addition, MFR may consider: (1) the frequency of trades and quotes; (2) the
number of dealers and potential purchasers; (3) dealer undertakings to make a
market; and (4) the nature of the security and of the market place trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer). Investing in Rule 144A securities could have the
effect of increasing the amount of a Series' assets invested in illiquid
securities to the extent that qualified institutional buyers become
uninterested, for a time, in purchasing these securities.
AMERICAN DEPOSITARY RECEIPTS (ADRS) -- Each of the Series may invest in
ADRs. ADRs are dollar-denominated receipts issued generally by U.S. banks and
which represent the deposit with the bank of a foreign company's securities.
ADRs are publicly traded on exchanges or over-the-counter in the United States.
Investors should consider carefully the substantial risks involved in investing
in securities issued by companies of foreign nations, which are in addition to
the usual risks inherent in domestic investments. See "Foreign Investment
Risks," below.
SOVEREIGN DEBT - Each of the Series may invest in sovereign debt securities
of emerging market governments, including Brady Bonds.
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Sovereign debt securities are those issued by emerging market governments that
are traded in the markets of developed countries or groups of developed
countries. Investments in such securities involve special risks. The issuer of
the debt or the governmental authorities that control the repayment of the debt
may be unable or unwilling to repay principal or interest when due in accordance
with the terms of such debt. Periods of economic uncertainty may result in the
volatility of market prices of sovereign debt, and in turn the Series' net asset
value, to a greater extent than the volatility inherent in domestic fixed income
securities.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. Emerging market governments could default on
their sovereign debt. Such sovereign debtors also may be dependent on expected
disbursements from foreign governments, multilateral agencies and other entities
abroad to reduce principal and interest arrearages on their debt. The commitment
on the part of these governments, agencies and others to make such disbursements
may be conditioned on a sovereign debtor's implementation of economic reforms
and/or economic performance and the timely service of such debtor's obligations.
Failure to implement such reforms, achieve such levels of economic performance
or repay principal or interest when due, may result in the cancellation of such
third parties' commitments to lend funds to the sovereign debtor, which may
further impair such debtor's ability or willingness to timely service its debt.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing sovereign debt could adversely affect the Series'
investments. Emerging markets are faced with social and political issues and
some of them have experienced high rates of inflation in recent years and have
extensive internal debt. Among other effects, high inflation and internal debt
service requirements may adversely affect the cost and availability of future
domestic sovereign borrowing to finance governmental programs, and may have
other adverse social, political and economic consequences. Political changes or
a deterioration of a country's domestic economy or balance of trade may affect
the willingness of countries to service their sovereign debt. Although MFR
intends to manage the Series in a manner that will minimize the exposure to such
risks, there can be no assurance that adverse political changes will not cause a
Series to suffer a loss of interest or principal on any of its holdings.
In recent years, some of the emerging market countries in which the Series
expect to invest have encountered difficulties in servicing their sovereign debt
obligations. Some of these countries have withheld payments of interest and/or
principal of sovereign debt. These difficulties have also led to agreements to
restructure external debt obligations -- in particular, commercial bank loans,
typically by rescheduling principal payments, reducing interest rates and
extending new credits to finance interest payments on existing debt. In the
future, holders of emerging market sovereign debt securities may be requested to
participate in similar rescheduling of such debt. Certain emerging market
countries are among the largest debtors to commercial banks and foreign
governments. At times certain emerging market countries have declared a
moratorium on the
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payment of principal and interest on external debt; such a moratorium is
currently in effect in certain emerging market countries. There is no bankruptcy
proceeding by which a creditor may collect in whole or in part sovereign debt on
which an emerging market government has defaulted.
The ability of emerging market governments to make timely payments on their
sovereign debt securities is likely to be influenced strongly by a country's
balance of trade and its access to trade and other international credits. A
country whose exports are concentrated in a few commodities could be vulnerable
to a decline in the international prices of one or more of such commodities.
Increased protectionism on the part of a country's trading partners could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any. To the extent that a country receives payment for its
exports in currencies other than hard currencies, its ability to make hard
currency payments could be affected.
Investors should also be aware that certain sovereign debt instruments in
which a Series may invest involve great risk. As noted above, sovereign debt
obligations issued by emerging market governments generally are deemed to be the
equivalent in terms of quality to securities rated below investment grade by
Moody's and S&P. Such securities are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations and involve major risk exposure to
adverse conditions. Some of such securities, with respect to which the issuer
currently may not be paying interest or may be in payment default, may be
comparable to securities rated D by S&P or C by Moody's. The Series may have
difficulty disposing of and valuing certain sovereign debt obligations because
there may be a limited trading market for such securities. Because there is no
liquid secondary market for many of these securities, the Series anticipates
that such securities could be sold only to a limited number of dealers or
institutional investors. Certain sovereign debt securities may be illiquid.
BRADY BONDS - Each of the Series may invest in "Brady Bonds," which are
debt restructurings that provide for the exchange of cash and loans for newly
issued bonds. Brady Bonds are securities created through the exchange of
existing commercial bank loans to public and private entities in certain
emerging markets for new bonds in connection with debt restructuring under a
debt restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady. Brady Bonds recently have been issued by the governments of
Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Ecuador, Jordan,
Mexico, Nigeria, Peru, The Philippines, Poland, Uruguay and Venezuela and are
expected to be issued by other emerging market countries. Approximately $150
billion in principal amount of Brady Bonds has been issued to date. Series
investors should recognize that Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the secondary market for Latin
American debt. The Salomon Brothers Brady Bond Index provides a benchmark that
can be used to compare returns of emerging market Brady Bonds with returns in
other bond markets, e.g., the U.S. bond market.
The Series may invest in either collateralized or uncollateralized Brady
Bonds in various currencies. U.S. dollar-denominated, collateralized Brady
Bonds, which may be fixed rate par bonds or floating rate discount bonds, are
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds. Interest payments on such bonds generally are
collateralized by cash or securities in an
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amount that, in the case of fixed rate bonds, is equal to at least one year of
rolling interest payments or, in the case of floating rate bonds, initially is
equal to at least one year's rolling interest payments based on the applicable
interest rate at the time and is adjusted at regular intervals thereafter.
LOAN PARTICIPATIONS AND ASSIGNMENTS -- The Emerging Markets Total Return
and Global High Yield Series may invest in fixed and floating rate loans
("Loans") arranged through private negotiations between a foreign entity and one
or more financial institutions ("Lenders"). The majority of the Series'
investments in Loans in emerging markets is expected to be in the form of
participations in Loans ("Participations") and assignments of portions of Loans
from third parties ("Assignments"). Participations typically will result in the
Series having a contractual relationship only with the Lender, not with the
borrower. The Series will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. In connection with purchasing Participations, the Series generally
will have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to the Loan ("Loan Agreement"), nor any rights of
set-off against the borrower, and the Series may not directly benefit from any
collateral supporting the Loan in which it has purchased the Participation. As a
result, the Series will assume the credit risk of both the borrower and the
Lender that is selling the Participation.
In the event of the insolvency of the Lender selling a Participation, the
Series may be treated as a general creditor of the Lender and may not benefit
from any set-off between the Lender and the borrower. The Series will acquire
Participations only if the Lender interpositioned between the Series and the
borrower is determined by MFR to be creditworthy. When the Series purchases
Assignments from Lenders, the Series will acquire direct rights against the
borrower on the Loan. However, since Assignments are arranged through private
negotiations between potential assignees and assignors, the rights and
obligations acquired by the Series as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender.
The Series may have difficulty disposing of Assignments and Participations.
The liquidity of such securities is limited and the Series anticipates that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Series' ability to dispose of particular
Assignments or Participations when necessary to meet the Series' liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Series to
assign a value to those securities for purposes of valuing the Series' portfolio
and calculating its net asset value.
ZERO COUPON SECURITIES -- Each of the Series may invest in certain zero
coupon securities that are "stripped" U.S. Treasury notes and bonds. The Series
also may invest in zero coupon and other deep discount securities issued by
foreign governments and domestic and foreign corporations, including certain
Brady Bonds and other foreign debt and payment-in-kind securities. Zero coupon
securities pay no interest to holders prior to maturity, and payment-in-kind
securities pay interest in the form of additional securities. However, a portion
of the original issue discount on zero coupon securities and the "interest" on
payment-in-kind securities will be included in the investing Series' income.
Accordingly, for the Series to qualify for tax treatment as a regulated
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investment company and to avoid certain taxes (see "Dividends and Taxes" in the
Statement of Additional Information), the Series may be required to distribute
an amount that is greater than the total amount of cash it actually receives.
These distributions must be made from the Series' cash assets or, if necessary,
from the proceeds of sales of portfolio securities. The Series will not be able
to purchase additional income-producing securities with cash used to make such
distributions and its current income ultimately may be reduced as a result. Zero
coupon and payment-in-kind securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of comparable
maturities that make current distributions of interest in cash.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS
- -- Each of the Series may enter into repurchase agreements. Repurchase
agreements are transactions in which the purchaser buys a debt security from a
bank or recognized securities dealer and simultaneously commits to resell that
security to the bank or dealer at an agreed upon price, date and market rate of
interest unrelated to the coupon rate or maturity of the purchased security.
Repurchase agreements are considered to be loans which must be fully
collateralized including interest earned thereon during the entire term of the
agreement. If the institution defaults on the repurchase agreement, the Series
will retain possession of the underlying securities. If bankruptcy proceedings
are commenced with respect to the seller, realization on the collateral by the
Series may be delayed or limited and the Series may incur additional costs. In
such case, the Series will be subject to risks associated with changes in market
value of the collateral securities. The Series intends to enter into repurchase
agreements only with banks and broker/dealers believed to present minimal credit
risks.
Each Series also may enter into reverse repurchase agreements with the same
parties with whom they may enter into repurchase agreements. Under a reverse
repurchase agreement, a Series would sell securities and agree to repurchase
them at a particular price at a future date. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale by a Series may decline below the price of the securities the Series has
sold but is obligated to repurchase. In the event the buyer of securities under
a reverse repurchase agreement files for bankruptcy or becomes insolvent, such
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Series' obligation to repurchase the securities, and the
Series' use of the proceeds of the reverse repurchase agreement may effectively
be restricted pending such decision.
Each Series also may enter into "dollar rolls," in which the Series sells
fixed income securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and maturity)
securities on a specified future date. During the roll period, the Series would
forego principal and interest paid on such securities. The Series would be
compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale. At the time a Series enters into reverse
repurchase agreements or dollar rolls, it will establish and maintain a
segregated account with its custodian containing cash or liquid high grade debt
securities having a value not less than the repurchase price, including accrued
interest. Reverse repurchase agreements and dollar rolls will be treated as
borrowings and will be deducted from the Series' assets for purposes
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of calculating compliance with the Series' borrowing limitation. See the
discussion under "Borrowing" below.
INVESTMENT METHODS
CASH RESERVES -- Each of the Series may establish and maintain reserves as
MFR believes is advisable to facilitate the Series' cash flow needs (e.g.,
redemptions, expenses and, purchases of portfolio securities) or for temporary,
defensive purposes. Such reserves may be invested in domestic and foreign money
market instruments rated within the top two credit categories by a national
rating organization, or if unrated, the MFR equivalent. Each Series may invest
in shares of other investment companies. A Series' investment in shares of other
investment companies may not exceed immediately after purchase 10 percent of the
Series' total assets and no more than 5 percent of its total assets may be
invested in the shares of any one investment company. Investment in the shares
of other investment companies has the effect of requiring shareholders to pay
the operating expenses of two mutual funds.
BORROWING -- Each of the Series may borrow money from banks as a temporary
measure for emergency purposes, to facilitate redemption requests, or for other
purposes consistent with the Series' investment objective and policies.
From time to time, it may be advantageous for a Series to borrow money
rather than sell existing portfolio positions to meet redemption requests.
Accordingly, each Series may borrow from banks or through reverse repurchase
agreements and "roll" transactions. Global High Yield Series may borrow up to 5
percent of its total assets and the Global Asset Allocation and Emerging Markets
Total Return Series each may borrow up to 33 1/3 percent of total assets. To the
extent that a Series purchases securities while it has outstanding borrowings,
it is using leverage, i.e., using borrowed funds for investment. Leveraging will
exaggerate the effect on net asset value of any increase or decrease in the
market value of a Series' portfolio. Money borrowed for leveraging will be
subject to interest costs that may or may not be recovered by appreciation of
the securities purchased; in certain cases, interest costs may exceed the return
received on the securities purchased. A Series also may be required to maintain
minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest rate.
OPTIONS, FUTURES AND FORWARD CURRENCY TRANSACTIONS -- To manage exposure to
changes in securities prices, interest rates and currency exchange rates and as
an efficient means of adjusting overall exposure to certain markets, each Series
may employ certain risk management practices involving the use of forward
currency contracts and options contracts, futures contracts and options on
futures contracts. Each Series also may enter into interest rate, currency and
index swaps and purchase or sell related caps, floors and collars. The Series'
investment in derivative securities will be utilized for hedging purposes and
not for speculation. See "Swaps, Caps, Floors and Collars" below. See also
"Derivative Instruments: Options, Futures and Forward Currency Strategies" in
the Statement of Additional Information. There can be no assurance that a
Series' risk management practices will succeed. Only a limited market, if any,
currently exists for forward currency contracts and options and futures
instruments relating to currencies of most emerging markets, to securities
denominated in such currencies or to securities of issuers domiciled or
principally engaged in business in such emerging markets. To the extent that
such a market does not exist, the Series may not be able to effectively hedge
its investment in such emerging markets.
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To attempt to hedge against adverse movements in exchange rates between
currencies, the Series may enter into forward currency contracts for the
purchase or sale of a specified currency at a specified future date. Such
contracts may involve the purchase or sale of a foreign currency against the
U.S. dollar or may involve two foreign currencies. The Series may enter into
forward currency contracts either with respect to specific transactions or with
respect to portfolio positions. For example, when a Series anticipates making a
purchase or sale of a security, it may enter into a forward currency contract in
order to set the rate (either relative to the U.S. dollar or another currency)
at which a currency exchange transaction related to the purchase or sale will be
made. Further, when it is anticipated that a particular currency may decline
compared to the U.S. dollar or another currency, the Series may enter into a
forward contract to sell the currency expected to decline in an amount up to the
value of the portfolio securities held by the Series denominated in a foreign
currency.
In addition, each Series may purchase put and call options and write such
options on a "covered" basis on securities that are traded on recognized
securities exchanges and over-the-counter ("OTC") markets. The Series will cause
its custodian to segregate cash, cash equivalents (such as commercial paper and
money market instruments), U.S. Government securities or other high grade,
liquid debt obligations having a value sufficient to meet the Series'
obligations under the option. Each Series also may enter into interest rate
futures contracts and stock index futures contracts and may purchase and write
options to buy and sell such futures contracts, to the extent permitted under
regulations of the Commodities Futures Trading Commission ("CFTC").
An interest rate futures contract obligates the seller of the contract to
deliver, and the purchaser to take delivery of, interest rate securities called
for in a contract at a specified future time at a specified price. A stock index
assigns relative values to common stocks included in the index and the index
fluctuates with changes in the market values of the common stocks included. A
stock index futures contract is a bilateral contract pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the close of
the last trading day of the contract and the price at which the futures contract
is originally struck. An option on a financial futures contract gives the
purchaser the right to assume a position in the contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option.
The Series will not employ these practices for speculation; however, these
practices may result in the loss of principal under certain conditions. In
addition, certain provisions of the Internal Revenue Code of 1986, as amended
("Code"), limit the extent to which a Series may enter into forward contracts or
futures contracts or engage in options transactions. See "Dividends and Taxes"
in the Statement of Additional Information. The Series also may purchase put or
call options or futures contracts on currencies for the same purposes as they
may use forward currency contracts.
A Series' use of forward currency contracts or options and futures
transactions thereon, involve certain investment risks and transaction costs to
which it might not otherwise be subject. These risks include: an inability to
predict movements in exchange rates; imperfect correlation between movements in
exchange rates and movements in the currency hedged; and the fact that the
skills needed to effectively hedge against the Series' currency risks are
different from those needed to select the securities in which a Series invests.
The Series also may conduct its foreign currency exchange transactions on a spot
(i.e., cash) basis
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at the spot rate prevailing in the foreign currency exchange market.
SWAPS, CAPS, FLOORS AND COLLARS -- Each Series may enter into interest
rate, index and currency swaps, and the purchase or sale of related caps, floors
and collars. The Series expect to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations as a technique for managing
the portfolio's duration (i.e., the price sensitivity to changes in interest
rates) or to protect against any increase in the price of securities the Series
anticipates purchasing at a later date. The Series intend to use these
transactions as hedges and not as speculative investments, and a Series will not
sell interest rate caps or floors if it does not own securities or other
instruments providing the income the Series may be obligated to pay.
Interest rate swaps involve the exchange by the Series with another party
of their respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments) with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount based on changes in the values of the reference
indices.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate. The purchase of an
interest rate floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a specified
index falls below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
HYBRID INSTRUMENTS -- The Global Asset Allocation and Emerging Markets
Total Return Series may invest in hybrid instruments which combine the elements
of futures contracts or options with those of debt, preferred equity or a
depository instrument ("Hybrid Instruments"). Often these Hybrid Instruments are
indexed to the price of a commodity or particular currency or a domestic or
foreign debt or equity securities index. Hybrid Instruments may take a variety
of forms, including, but not limited to, debt instruments with interest or
principal payments or redemption terms determined by reference to the value of a
currency or commodity at a future point in time, preferred stock with dividend
rates determined by reference to the value of a currency, or convertible
securities with the conversion terms related to a particular commodity. The
risks of investing in Hybrid Instruments reflect a combination of the risks from
investing in securities, futures and currencies, including volatility and lack
of liquidity. Reference is made to the discussion of futures and forward
contracts in the Statement of Additional Information for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the related commodity or
currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Series and the seller of the Hybrid Instrument,
the creditworthiness of the contract party to the transaction would be a risk
factor which the Series would have to consider. Hybrid Instruments also may not
be subject to regulation of the CFTC, which generally regulates the trading of
commodity futures by U.S. persons, the SEC, which regulates the offer and sale
of securities by and to U.S. persons, or any other governmental regulatory
authority.
LENDING OF PORTFOLIO SECURITIES -- The Global Asset Allocation Series may
lend securities to
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broker-dealers, institutional investors, or other persons to earn income. The
principal risk is the potential insolvency of the broker-dealer or other
borrower. In this event, the Series could experience delays in recovering its
securities and possibly capital losses. Any loan will be continuously secured by
collateral at least equal to the value of the security loaned. Such lending
could result in delays in receiving additional collateral or in the recovery of
the securities or possible loss of rights in the collateral should the borrower
fail financially.
RISK FACTORS
GENERAL RISK FACTORS -- Each Series' net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions and its
net currency exposure. The value of fixed income securities held by the Series
generally fluctuates inversely with interest rate movements. In other words,
bond prices generally fall as interest rates rise and generally rise as interest
rates fall. Longer term bonds held by the Series are subject to greater interest
rate risk. There is no assurance that any Series will achieve its investment
objective.
FUTURES AND OPTIONS RISK -- Futures contracts and options can be highly
volatile and could result in reduction of a Series' total return, and a Series'
attempt to use such investments for hedging purposes may not be successful.
Successful futures strategies require the ability to predict future movements in
securities prices, interest rates and other economic factors. Losses from
options and futures could be significant if a Series is unable to close out its
position due to distortions in the market or lack of liquidity. A Series' risk
of loss from the use of futures extends beyond its initial investment and could
potentially be unlimited.
The use of futures, options and forward contracts involves investment risks
and transaction costs to which a Series would not be subject absent the use of
these strategies. If MFR, Lexington or SMC seeks to protect a Series against
potential adverse movements in the securities, foreign currency or interest rate
markets using these instruments, and such markets do not move in a direction
adverse to such Series, such Series could be left in a less favorable position
than if such strategies had not been used. Risks inherent in the use of futures,
options and forward contracts include: (a) the risk that interest rates,
securities prices and currency markets will not move in the directions
anticipated; (b) imperfect correlation between the price of futures, options and
forward contracts and movements in the prices of the securities or currencies
being hedged; (c) the fact that skills needed to use these strategies are
different from those needed to select portfolio securities; (d) the possible
absence of a liquid secondary market for any particular instrument at any time;
and (e) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences. A Series' ability to terminate option positions
established in the over-the-counter market may be more limited than in the case
of exchange-traded options and may also involve the risk that securities dealers
participating in such transactions would fail to meet their obligations to such
Series.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the price of
securities which are the subject of a hedge. Such correlation, particularly with
respect to options on stock indices and stock index futures, is imperfect, and
such risk increases as the composition of the Series diverges from the
composition of the relevant index. The successful use of these strategies also
depends on the ability of MFR and the relevant sub-adviser to correctly forecast
interest rate movements and general stock market price movements.
FOREIGN INVESTMENT RISK -- Investment in foreign securities involves risks
and considerations
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not present in domestic investments. Foreign companies generally are not subject
to uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. companies. The securities of
non-U.S. issuers generally are not registered with the SEC, nor are the issuers
thereof usually subject to the SEC's reporting requirements. Accordingly, there
may be less publicly available information about foreign securities and issuers
than is available with respect to U.S. securities and issuers. A Series' income
and gains from foreign issuers may be subject to non-U.S. withholding or other
taxes, thereby reducing their income and gains. In addition, with respect to
some foreign countries, there is the increased possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Series, political or social instability, or diplomatic developments which
could affect the investments of the Series in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
rate of savings and capital reinvestment, resource self-sufficiency and balance
of payments positions.
CURRENCY RISK -- Since each Series may invest substantially in securities
denominated in currencies other than the U.S. dollar, and since they may hold
foreign currencies, the value of such securities will be affected favorably or
unfavorably by exchange control regulations or changes in the exchange rates
between such currencies and the U.S. dollar. Changes in currency exchange rates
will influence the value of the Series' shares, and also may affect the value of
dividends and interest earned by the Series and gains and losses realized by the
Series. In addition, the Series will incur costs in connection with the
conversion or transfer of foreign currencies. Currencies generally are evaluated
on the basis of fundamental economic criteria (e.g., relative inflation and
interest rate levels and trends, growth rate forecasts, balance of payments
status and economic policies) as well as technical and political data. The
exchange rates between the U.S. dollar and other currencies are determined by
supply and demand in the currency exchange markets, the international balance of
payments, governmental intervention, speculation and other economic and
political conditions.
If the currency in which a security is denominated appreciates against the U.S.
dollar, the dollar value of the security will increase. Conversely, a decline in
the exchange rate of the currency would adversely affect the value of the
security expressed in U.S. dollars.
RISKS ASSOCIATED WITH INVESTMENT IN EMERGING MARKETS -- Each of the Series
may invest in emerging markets. Because of the special risks associated with
investing in emerging markets, an investment in a Series making such investments
should be considered speculative. Investors are strongly advised to consider
carefully the special risks involved in emerging markets, which are in addition
to the usual risks of investing in developed foreign markets around the world.
Investing in emerging markets involves risks relating to potential political and
economic instability within such markets and the risks of expropriation,
nationalization, confiscation of assets and property or the imposition of
restrictions on foreign investment and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation in any
emerging market, a Series could lose its entire investment in that market. Many
emerging market countries have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of
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certain emerging market countries. Economies in emerging markets generally are
dependent heavily upon international trade and, accordingly, have been and may
continue to be affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade. These economies also have
been and may continue to be affected adversely by economic conditions in the
countries with which they trade.
The securities markets of emerging countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the United States and
other major markets. There also may be a lower level of monitoring and
regulation of emerging securities markets and the activities of investors in
such markets, and enforcement of existing regulations has been extremely
limited. Investments may also be made in former communist countries. There is a
possibility that these countries may revert to communism. In addition, brokerage
commissions, custodial services and other costs relating to investment in
foreign markets generally are more expensive than in the United States,
particularly with respect to emerging markets. Such markets have different
settlement and clearance procedures. In certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. The inability of
a Series to make intended securities purchases due to settlement problems could
cause it to forego attractive investment opportunities. Inability to dispose of
a portfolio security caused by settlement problems could result either in losses
to a Series due to subsequent declines in value of the portfolio security or, if
a Series has entered into a contract to sell the security, could result in
possible liability to the purchaser.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for a Series' portfolio securities in such
markets may not be readily available. Section 22(e) of the 1940 Act permits a
registered investment company to suspend redemption of its shares for any period
during which an emergency exists, as determined by the SEC. Accordingly, when
the Fund believes that appropriate circumstances warrant, it will promptly apply
to the SEC for a determination that an emergency exists within the meaning of
Section 22(e) of the 1940 Act. During the period commencing from the Fund's
identification of such conditions until the date of SEC action, the portfolio
securities of a Series in the affected markets will be valued at fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors.
RISKS ASSOCIATED WITH LOWER-RATED DEBT SECURITIES (JUNK BONDS) -- Each of
the Series may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"). Debt rated BB, B, CCC, CC and C by S&P and rated Ba, B, Caa,
Ca and C by Moody's, is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation and C the highest degree of speculation. For Moody's, Ba
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Similarly, debt rated Ba or BB and below is
regarded by the relevant rating agency as speculative. Debt rated
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C by Moody's or S&P is the lowest quality debt that is not in default as to
principal or interest and such issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing. Such
securities are also generally considered to be subject to greater risk than
higher quality securities with regard to a deterioration of general economic
conditions. Each Series may invest in debt securities rated below C, which are
in default as to principal and/or interest. Ratings of debt securities represent
the rating agency's opinion regarding their quality and are not a guarantee of
quality. Rating agencies attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Also, rating agencies may fail to make timely changes in credit quality in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than a rating indicates.
The market value of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower quality securities may
experience financial stress. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. Similarly, certain emerging market governments that issue lower
quality debt securities are among the largest debtors to commercial banks,
foreign governments and supranational organizations such as the World Bank and
may not be able or willing to make principal and/or interest repayments as they
come due. The risk of loss due to default by the issuer is significantly greater
for the holders of lower quality securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Lower quality debt securities of corporate issuers frequently have call or
buy-back features which would permit an issuer to call or repurchase the
security from the Series. If an issuer exercises these provisions in a declining
interest rate market, the Series may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition,
the Series may have difficulty disposing of lower quality securities because
there may be a thin trading market for such securities. There may be no
established retail secondary market for many of these securities, and the Series
anticipates that such securities could be sold only to a limited number of
dealers or institutional investors. The lack of a liquid secondary market also
may have an adverse impact on market prices of such instruments and may make it
more difficult for the Fund to obtain accurate market quotations for purposes of
valuing the securities in the portfolios of the Series.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
quality securities, especially in a thinly traded market. The Series also may
acquire lower quality debt securities during an initial underwriting or may
acquire lower quality debt securities which are sold without registration under
applicable securities laws. Such securities involve special considerations and
risks.
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Factors having an adverse effect on the market value of lower rated
securities or their equivalents purchased by the Series will adversely impact
net asset value of the Series. See "Risk Factors" in the Statement of Additional
Information. In addition to the foregoing, such factors may include: (i)
potential adverse publicity; (ii) heightened sensitivity to general economic or
political conditions; and (iii) the likely adverse impact of a major economic
recession. The Series also may incur additional expenses to the extent they are
required to seek recovery upon a default in the payment of principal or interest
on portfolio holdings, and the Series may have limited legal recourse in the
event of a default. Debt securities issued by governments in emerging markets
can differ from debt obligations issued by private entities in that remedies
from defaults generally must be pursued in the courts of the defaulting
government, and legal recourse is therefore somewhat diminished. Political
conditions, in terms of a government's willingness to meet the terms of its debt
obligations, also are of considerable significance. There can be no assurance
that the holders of commercial bank debt may not contest payments to the holders
of debt securities issued by governments in emerging markets in the event of
default by the governments under commercial bank loan agreements.
MFR and Lexington will attempt to minimize the speculative risks associated
with investments in lower quality securities through credit analyses and by
carefully monitoring current trends in interest rates, political developments
and other factors. Nonetheless, investors should carefully review the investment
objectives and policies of the Series and consider their ability to assume the
investment risks involved before making an investment in the Series.
MANAGEMENT OF THE SERIES
The management of the Series' business and affairs is the responsibility of
the Fund's Board of Directors. MFR Advisors, Inc. ("MFR"), One Liberty Plaza,
New York, New York 10006 is responsible for selection and management of the
Series' portfolio investments. MFR currently acts as subadviser to the Lexington
Ramirez Global Income Fund and SBL Fund-Global Aggressive Bond Series and also
serves as an institutional manager for private clients. Maria Fiorini Ramirez,
Inc. ("Ramirez") owns 100 percent of the outstanding common stock of MFR.
Ramirez which was established in August of 1992 to provide global economic
consulting, and through its subsidiary companies, investment advisory and
broker-dealer services is the successor firm to Maria Ramirez Capital
Consultants, Inc. ("MRCC"). MRCC was formed in April 1990 as a subsidiary of
John Hancock Freedom Securities Corporation and offered in-depth economic
consulting services to clients. Maria Fiorini Ramirez owns 100 percent of the
common stock of Ramirez and Freedom Securities Corporation owns preferred
securities which would, under certain circumstances be convertible to 20 percent
of Ramirez's common stock.
MFR has engaged Security Management Company, LLC ("SMC"), 700 SW Harrison
Street, Topeka, Kansas 66636, to provide certain investment advisory services to
the Global Asset Allocation Series with respect to the Series' investments in
domestic equity securities. SMC is a wholly-owned subsidiary of Security Benefit
Life Insurance Company. MFR has also engaged Lexington Management Corporation
("Lexington"), Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663, to
provide certain investment advisory services to the Global High Yield Series,
Global Asset Allocation Series and Emerging Market Total Return Series.
Lexington is a wholly-owned subsidiary of Lexington Global Asset
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Managers, Inc., a Delaware corporation with offices at Park 80 West, Plaza Two,
Saddle Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities have a majority voting control of the
outstanding shares of Lexington Global Asset Managers, Inc. Lexington was
established in 1938 and currently manages over $3.8 billion in assets.
Subject to the supervision and direction of the Fund's Board of Directors,
MFR and Lexington, and with respect to the Global Asset Allocation Series, SMC,
manage the Series' portfolios in accordance with each Series' stated investment
objective and policies and make all investment decisions. MFR has agreed that
total annual expenses of the respective Series (including for any fiscal year,
the management fee, but excluding interest, taxes, brokerage commissions,
extraordinary expenses and Class B distribution fees) shall not exceed the level
of expenses which the Series are permitted to bear under the most restrictive
expense limitation imposed by any state in which shares of the Series are then
qualified for sale. MFR will contribute such funds to the Series or waive such
portion of its compensation as may be necessary to insure that such total annual
expenses do not exceed any such limitation. As compensation for its investment
management services, MFR receives on an annual basis, .75 percent of the average
daily net assets of the Global High Yield Series, and 1 percent of the average
daily net assets of each of the Global Asset Allocation Series and Emerging
Markets Total Return Series, computed on a daily basis and payable monthly. As
compensation for the services provided to the Global Asset Allocation Series,
MFR pays each of Lexington and SMC, as Sub-Advisers, on an annual basis, a fee
equal to .20 percent and .15 percent, respectively, of the average daily net
assets of the Series. With respect to the Global High Yield and Emerging Markets
Total Return Series, MFR pays Lexington, as Sub-Adviser, on an annual basis, a
fee equal to .20 percent of the average daily net assets of each such Series.
Fees paid to the sub-Advisers are calculated daily and payable monthly.
SMC also acts as the administrative agent for the Series, and as such
performs administrative functions, and the bookkeeping, accounting and pricing
functions for the Funds. For this service the Investment Manager receives on an
annual basis, an administrative fee of .045 percent of the average daily net
assets of each Series calculated daily and payable monthly. In addition, the
Investment Manager receives, with respect to Global High Yield Series, an
accounting fee equal to the greater of .10 percent of its average daily net
assets or $60,000 and with respect to the Emerging Markets Total Return and
Asset Allocation Series, an accounting fee equal to the greater of .10 percent
of the average daily net assets of each Series, calculated daily and payable
monthly, or (i) $30,000 in the year ended May 1, 1998; (ii) $45,000 in the year
ended May 1, 1999; or (iii) $60,000 thereafter. SMC also acts as the transfer
agent and dividend disbursing agent for the Series. The Series' expenses include
fees paid to MFR and SMC as well as expenses of brokerage commissions, interest,
taxes, distribution fees and extraordinary expenses approved by the Board of
Directors of the Fund.
For the year ended December 31, 1996, the total expenses, as a percentage
of average net assets, were 1.98 percent for Class A shares and 2.75 percent for
Class B shares of Global High Yield Series. Expense information is not yet
available for the other Series as they did not begin operations until May 1,
1997.
PORTFOLIO MANAGEMENT
The Global Asset Allocation Series is managed by an investment management
team of MFR. Bruce Jensen, Chief Investment Officer, has day-to-day
responsibility for managing the Series and directs the allocation of investments
among common stocks and fixed income securities. The
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common stock portion of the Series' portfolio receives sub-investment advisory
services from Lexington for international equities and SMC for domestic
equities. The Global High Yield Series is managed by an investment management
team of Lexington and MFR. Denis P. Jamison and Maria Fiorini Ramirez have
day-to-day responsibility for managing the Series and have managed the Series
since its inception in 1995. The Emerging Markets Total Return Series is managed
by an investment management team of MFR. Bruce Jensen, Chief Investment Officer,
has day-to-day responsibility for managing the Series and directs the allocation
of investments among common stocks and fixed income securities. The common stock
portion of the Series receives sub-investment advisory services from Lexington.
Denis Jamison, C.F.A., Senior Vice President, Director Fixed Income
Strategy of Lexington, is responsible for fixed-income portfolio management. He
is a member of the New York Society of Security Analysts. Mr. Jamison has more
than 20 years investment experience. Prior to joining Lexington in 1981, Mr.
Jamison spent nine years at Arnold Bernhard & Company, an investment counseling
and financial services organization. At Bernhard, he was a Vice President
supervising the security analyst staff and managing investment portfolios. He is
a specialist in government, corporate and municipal bonds. Mr. Jamison is a
graduate of the City College of New York with a B.A. in Economics.
Bruce Jensen, Chief Investment Officer of MFR, holds a bachelor's degree in
Accounting from Boston University and an M.B.A. in Finance from Fairleigh
Dickinson University. Prior to joining the Investment Manager in 1992, he spent
six years with the Pilgrim Group in Los Angeles and was Senior Vice President in
charge of Fixed Income. Prior to Pilgrim, Mr. Jensen was a fixed income
Portfolio Manger with Lexington. Mr. Jensen has managed the Emerging Markets
Total Return and Global Asset Allocation Series since their inception, May 1,
1997.
Maria Fiorini Ramirez, President and Chief Executive Officer of MFR, began
her career as a credit analyst with American Express International Banking
Corporation in 1968. In 1972, she moved to Banco Nazionale De Lavoro in New
York. The following year, she started a ten year association with Merrill Lynch,
serving as Vice President and Senior Money Market Economist. She joined Becker
Paribas in 1984 as Vice President and Senior Money Market Economist before
joining Drexel Burnham Lambert that same year as First Vice President and Money
Market Economist. She was promoted to Managing Director of Drexel in 1986. From
April 1990 to August 1992, Ms. Ramirez was the President and Chief Executive
Officer of Maria Ramirez Capital Consultants, Inc., a subsidiary of John Hancock
Freedom Securities Corporation. Ms. Ramirez established MFR in August 1992. She
is known in international financial, banking and economic circles for her
assessment of the interaction between global economic policy and political
trends and their effect on investments. Ms. Ramirez holds a B.A. in Business
Administration/ Economics from Pace University.
HOW TO PURCHASE SHARES
As discussed below, shares of the Series may be purchased with either a
front-end or contingent deferred sales charge. Each Series reserves the right to
withdraw all or any part of the offering made by this prospectus and to reject
purchase orders.
As a convenience to investors and to save operating expenses, the Series do
not issue certificates for Series shares except upon written request by the
stockholder.
Security Distributors, Inc. (the "Distributor"), is principal underwriter
for the Series. Shares of the Series may be purchased through authorized
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investment dealers. In addition, banks and other financial institutions that
have an agreement with the Distributor may make shares of the Series available
to their customers. The minimum initial purchase must be $100 and subsequent
purchases must be $100 unless made through an Accumulation Plan which allows
subsequent purchases of $20.
Orders for the purchase of shares of the Series will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by the Distributor (generally as of the
close of the Exchange on that day) plus the sales charge in the case of Class A
shares. Orders received by dealers or other firms prior to the close of the
Exchange and received by the Distributor prior to the close of its business day
will be confirmed at the offering price effective as of the close of the
Exchange on that day.
Orders for shares received by broker/dealers prior to that day's close of
trading on the New York Stock Exchange and transmitted to the Distributor prior
to its close of business that day will receive the offering price equal to the
net asset value per share computed at the close of trading on the Exchange on
the same day plus, in the case of Class A shares, the sales charge. Orders
received by broker/dealers after that day's close of trading on the Exchange and
transmitted to the Distributor prior to the close of business on the next
business day will receive the next business day's offering price.
ALTERNATIVE PURCHASE OPTIONS The Series offer two classes of shares:
CLASS A SHARES - FRONT-END LOAD OPTION. Class A shares are sold with a
sales charge at the time of purchase. Class A shares are not subject to a sales
charge when they are redeemed (except that shares sold in an amount of
$1,000,000 or more without a front-end sales charge will be subject to a
contingent deferred sales charge for one year). See Appendix B on page 45 for a
discussion of possible reductions in the front-end sales charge.
CLASS B SHARES - BACK-END LOAD OPTION. Class B shares are sold without a
sales charge at the time of purchase, but are subject to a deferred sales charge
if they are redeemed within five years of the date of purchase. Class B shares
will automatically convert tax-free to Class A shares at the end of eight years
after purchase.
The decision as to which class is more beneficial to an investor depends on
the amount and intended length of the investment. Investors who would rather pay
the entire cost of distribution at the time of investment, rather than spreading
such cost over time, might consider Class A shares. Other investors might
consider Class B shares, in which case 100 percent of the purchase price is
invested immediately, depending on the amount of the purchase and the intended
length of investment. The Series will not normally accept any purchase of Class
B shares in the amount of $250,000 or more.
Dealers or others receive different levels of compensation depending on
which class of shares they sell.
CLASS A SHARES
Class A shares of the Series are offered at net asset value plus an initial
sales charge as follows:
SALES CHARGE
----------------------------------------
AMOUNT OF APPLICABLE PERCENTAGE OF PERCENTAGE
PURCHASE AT PERCENTAGE OF NET AMOUNT REALLOWABLE
OFFERING PRICE OFFERING PRICE INVESTED TO DEALERS
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Less than $50,000 4.75% 4.99% 4.00%
$50,000 but less
than $100,000 3.75% 3.90% 3.00%
$100,000 but less
than $250,000 2.75% 2.83% 2.20%
$250,000 but less
than $1,000,000 1.75% 1.78% 1.40%
$1,000,000 and over None None (See below)
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Purchases of Class A shares in amounts of $1,000,000 or more are made at
net asset value (without a sales charge), but are subject to a contingent
deferred sales charge of one percent in the event of redemption within one year
following purchase. For a discussion of the contingent deferred sales charge,
see "Calculation and Waiver of Contingent Deferred Sales Charges" on page 33.
The Distributor will pay a commission to dealers on such purchases of
$1,000,000 or more as follows: 1.00 percent on sales up to $5,000,000, plus .50
percent on sales of $5,000,000 or more up to $10,000,000 and .10 percent on any
amount of $10,000,000 or more.
CLASS A DISTRIBUTION PLAN
In addition to the sales charge deducted from Class A shares at the time of
purchase, each Series is authorized, under a Distribution Plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Class A Distribution
Plan"), to use its assets to finance certain activities relating to the
distribution of its shares to investors. This Plan permits payments to be made
by the Series to the Distributor, to finance various activities relating to the
distribution of Class A shares to investors, including, but not limited to, the
payment of compensation (including incentive compensation to securities dealers
and other financial institutions and organizations) to obtain various
distribution-related and/or administrative services for the Series.
Under the Class A Distribution Plan, a monthly payment is made to the
Distributor in an amount computed at an annual rate of .25 percent of the
average daily net asset value of each Series' Class A shares. The distribution
fee is charged to each Series in proportion to the relative net assets of their
Class A shares. The distribution fees collected may be used by the Series to
finance joint distribution activities, for example joint advertisements, and the
costs of such joint activities will be allocated among the Series on a fair and
equitable basis, including on the basis of the relative net assets of their
Class A shares.
The Class A Distribution Plan authorizes payment by the Class A shares of
the Series of the cost of preparing, printing and distributing prospectuses and
Statements of Additional Information to prospective investors and of
implementing and operating the Plan.
In addition, compensation to securities dealers and others is paid from
distribution fees at an annual rate of .25 percent of the average daily net
asset value of Class A shares sold by such dealers and remaining outstanding on
the Series' books to obtain certain administrative services for the Series'
Class A stockholders. The services include, among other things, processing new
stockholder account applications and serving as the primary source of
information to customers in answering questions concerning the Series and their
transactions with the Series. The Distributor is also authorized to engage in
advertising, the preparation and distribution of sales literature and other
promotional activities on behalf of the Series. Other promotional activities
which may be financed pursuant to the Plan include (i) informational meetings
concerning the Series for registered representatives interested in selling
shares of the Series and (ii) bonuses or incentives offered to all or specified
dealers on the basis of sales of a specified minimum dollar amount of Class A
shares of the Series by the registered representatives employed by such
dealer(s). The expenses associated with the foregoing activities will include
travel expenses, including lodging. Additional information may be obtained by
referring to the Series' Statement of Additional Information.
The Series' Class A Distribution Plan may be terminated at any time by vote
of the directors of the Fund, who are not interested persons of the Fund as
defined in the 1940 Act or by vote of a majority of the outstanding Class A
shares of the
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Series. In the event the Class A Distribution Plan is terminated by the Series'
Class A stockholders or the Board of Directors, the payments made to the
Distributor pursuant to the Plan up to that time would be retained by the
Distributor. Any expenses incurred by the Distributor in excess of those
payments would be absorbed by the Distributor.
CLASS B SHARES
Class B shares of the Series are offered at net asset value, without an
initial sales charge. With certain exceptions, the Series may impose a deferred
sales charge on Class B shares redeemed within five years of the date of
purchase. No deferred sales charge is imposed on amounts redeemed thereafter. If
imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable. The deferred sales charge is retained by the Distributor.
Whether a contingent deferred sales charge is imposed and the amount of the
charge will depend on the number of years since the stockholder made a purchase
payment from which an amount is being redeemed, according to the following
schedule:
YEAR SINCE CONTINGENT DEFERRED
PURCHASE WAS MADE SALES CHARGE
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and following 0%
Class B shares (except shares purchased through the reinvestment of
dividends and other distributions paid with respect to Class B shares) will
automatically convert on the eighth anniversary of the date such shares were
purchased to Class A shares which are subject to a lower distribution fee. This
automatic conversion of Class B shares will take place without imposition of a
front-end sales charge or exchange fee. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to SMC.) All shares purchased through reinvestment of dividends and
other distributions paid with respect to Class B shares ("reinvestment shares")
will be considered to be held in a separate subaccount. Each time any Class B
shares (other than those held in the subaccount) convert to Class A shares, a
pro rata portion of the reinvestment shares held in the subaccount will also
convert to Class A shares. Class B shares so converted will no longer be subject
to the higher expenses borne by Class B shares. Because the net asset value per
share of the Class A shares may be higher or lower than that of the Class B
shares at the time of conversion, although the dollar value will be the same, a
stockholder may receive more or less Class A shares than the number of Class B
shares converted. Under current law, it is the Fund's opinion that such a
conversion will not constitute a taxable event under federal income tax law. In
the event that this ceases to be the case, the Board of Directors will consider
what action, if any, is appropriate and in the best interests of the Class B
stockholders.
CLASS B DISTRIBUTION PLAN
Each of the Series bears some of the costs of selling its Class B shares
under a Distribution Plan adopted with respect to its Class B shares ("Class B
Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("1940 Act"). Each Series' Plan provides for payments at an annual rate of
1.00 percent of the average daily net asset value of its Class B shares. Amounts
paid by the Series are currently used to pay dealers and other firms that make
Class B shares available to their customers (1) a commission at the time of
purchase normally equal to 4.00 percent of the value of each share sold and (2)
a
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PROSPECTUS
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service fee payable for each year after the first, quarterly, in an amount equal
to .25 percent annually of the average daily net asset value of Class B shares
sold by such dealers and other firms and remaining outstanding on the books of
the Series.
NASD Rules limit the aggregate amount that each Series may pay annually in
distribution costs for the sale of its Class B shares to 6.25 percent of gross
sales of Class B shares since the inception of the Distribution Plan, plus
interest at the prime rate plus one percent on such amount (less any contingent
deferred sales charges paid by Class B stockholders to the Distributor). The
Distributor intends, but is not obligated, to continue to apply or accrue
distribution charges incurred in connection with the Class B Distribution Plan
which exceed current annual payments permitted to be received by the Distributor
from the Series. The Distributor intends to seek full payment of such charges
from the Series (together with annual interest thereon at the prime rate plus
one percent) at such time in the future as, and to the extent that, payment
thereof by the Series would be within permitted limits.
Each Series' Class B Distribution Plan may be terminated at any time by
vote of its directors who are not interested persons of the Fund as defined in
the 1940 Act or by vote of a majority of the outstanding Class B shares. In the
event the Class B Distribution Plan is terminated by the Class B stockholders or
the Fund's Board of Directors, the payments made to the Distributor pursuant to
the Plan up to that time would be retained by the Distributor. Any expenses
incurred by the Distributor in excess of those payments would be absorbed by the
Distributor. The Series make no payments in connection with the sale of their
Class B shares other than the distribution fee paid to the Distributor.
CALCULATION AND WAIVER OF CONTINGENT DEFERRED SALES CHARGES
Any contingent deferred sales charge imposed upon redemption of Class A
shares (purchased in an amount of $1,000,000 or more) and Class B shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. No contingent deferred sales charge is imposed
upon redemption of amounts derived from (1) increases in the value above the net
cost of such shares due to increases in the net asset value per share of the
Fund; (2) shares acquired through reinvestment of income dividends and capital
gain distributions; or (3) Class A shares (purchased in an amount of $1,000,000
or more) held for more than one year or Class B shares held for more than five
years. Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed.
The contingent deferred sales charge is waived: (1) following the death of
a stockholder if redemption is made within one year after death; (2) upon the
disability (as defined in Section 72(m)(7) of the Internal Revenue Code) of a
stockholder prior to age 65 if redemption is made within one year after the
disability, provided such disability occurred after the stockholder opened the
account; (3) in connection with required minimum distributions in the case of an
IRA, SAR-SEP or Keogh or any other retirement plan qualified under section
401(a), 401(k) or 403(b) of the Code; and (4) in the case of distributions from
retirement plans qualified under section 401(a) or 401(k) of the Internal
Revenue Code due to (i) returns of excess contributions to the plan, (ii)
retirement of a participant in the plan, (iii) a loan from the plan (repayment
of loans, however, will constitute new sales for purposes of assessing the
contingent deferred sales charge), (iv) "financial hardship" of a participant in
the plan, as that term is defined in
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Treasury Regulation section 1.401(k)1(d)(2), as amended from time to time, (v)
termination of employment of a participant in the plan, (vi) any other
permissible withdrawal under the terms of the plan. The contingent deferred
sales charge will also be waived in the case of redemptions of Class B shares of
the Series pursuant to a systematic withdrawal program. See "Systematic
Withdrawal Program," page 40 for details.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Distributor, from time to time, will provide promotional incentives or
pay a bonus to certain dealers whose representatives have sold or are expected
to sell significant amounts of the Series. Such promotional incentives will
include payment for attendance (including travel and lodging expenses) by
qualifying registered representatives (and members of their families) at sales
seminars at luxury resorts within or outside the United States. Bonus
compensation may include reallowance of the entire sales charge and may also
include, with respect to Class A shares, an amount which exceeds the entire
sales charge and, with respect to Class B shares, an amount which exceeds the
maximum commission. The Distributor, or MFR may also provide financial
assistance to certain dealers in connection with conferences, sales or training
programs for their employees, seminars for the public, advertising, sales
campaigns, and/or shareholder services and programs regarding one or more of the
Series. Certain of the promotional incentives or bonuses may be financed by
payments to the Distributor under a Rule 12b-1 Distribution Plan. The payment of
promotional incentives and/or bonuses will not change the price an investor will
pay for shares or the amount that the Series will receive from such sale. No
compensation will be offered to the extent it is prohibited by the laws of any
state or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. ("NASD"). A Dealer to whom substantially the entire sales charge
on Class A shares is reallowed may be deemed to be an "underwriter" under
federal securities laws.
The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the Series for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above. Banks currently are prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Fund's Board of Directors would consider what
action, if any, would be appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
PURCHASES AT NET ASSET VALUE
Class A shares of the Series may be purchased at net asset value by (1)
directors, officers and employees of the Fund, MFR (and its affiliates) or the
Distributor; directors, officers and employees of Security Benefit Life
Insurance Company and its subsidiaries; agents licensed with Security Benefit
Life Insurance Company; spouses or minor children of any such agents; as well as
the following relatives of any such directors, officers and employees (and their
spouses): spouses, grandparents, parents, children, grandchildren, siblings,
nieces and nephews; (2) any trust, pension, profit sharing or other benefit plan
established by any of the foregoing corporations for persons described above;
(3) retirement plans where third party administrators of such plans have entered
into certain arrangements with the Distributor or its affiliates provided that
no commission is paid to dealers; and (4) officers,
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directors, partners or registered representatives (and their spouses and minor
children) of broker/dealers who have a selling agreement with the Distributor.
Such sales are made upon the written assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
transferred or resold except through redemption or repurchase by or on behalf of
the Series.
Class A shares of the Series also may be purchased at net asset value when
the purchase is made on the recommendation of (i) a registered investment
adviser, trustee or financial intermediary who has authority to make investment
decisions on behalf of the investor; or (ii) a certified financial planner or
registered broker-dealer who either charges periodic fees to its customers for
financial planning, investment advisory or asset management services, or
provides such services in connection with the establishment of an investment
account for which a comprehensive "wrap fee" is imposed. The Distributor must be
notified when a purchase is made that qualifies under this provision.
TRADING PRACTICES AND BROKERAGE
The portfolio turnover rate for the Global High Yield Series for the fiscal
year ended December 31, 1996, was 96 percent. Portfolio turnover information is
not yet available for the other Series as they did not begin operations until
May 1, 1997. The portfolio turnover rate of each Series may exceed 100 percent,
but is not expected to do so. Higher portfolio turnover subjects a Series to
increased brokerage costs and may, in some cases, have adverse tax effects on a
Series or its stockholders.
Transactions in portfolio securities are effected in the manner deemed to
be in the best interests of each Series. In selecting a broker or dealer to
execute a specific transaction, all relevant factors will be considered.
Portfolio transactions may be directed to brokers who furnish investment
information or research services to MFR or Lexington or who sell shares of the
Series. MFR may, consistent with the NASD Rules of Fair Practice, consider sales
of shares of the Series in the selection of a broker.
Securities held by the Series also may be held by other investment advisory
clients of MFR, including other investment companies. Purchases or sales of the
same security occurring on the same day may be aggregated and executed as a
single transaction, subject to MFR's obligation to seek best execution.
Aggregated purchases or sales are generally effected at an average price and on
a pro rata basis (transaction costs will also be shared on a pro rata basis) in
proportion to the amounts desired to be purchased or sold. See the Series'
Statement of Additional Information for a more detailed description of
aggregated transactions.
HOW TO REDEEM SHARES
A stockholder may redeem shares at the net asset value next determined
after the time when such shares are tendered for redemption.
Shares will be redeemed on request of the stockholder in proper order to
the Series' Transfer Agent, Security Management Company, LLC ("SMC"). A request
is made in proper order by submitting the following items to SMC: (1) a written
request for redemption signed by all registered owners exactly as the account is
registered, including fiduciary titles, if any, and specifying the account
number and the dollar amount or number of shares to be redeemed; (2) a guarantee
of all signatures on the written request or on the share certificate or
accompanying stock power; (3) any share certificates issued for any of the
shares to be redeemed; and (4) any additional documents which may be required by
SMC for redemption by corporations or other organizations, executors,
administrators, trustees,
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custodians or the like. Transfers of shares are subject to the same
requirements. The signature guarantee must be provided by an eligible guarantor
institution, such as a bank, broker, credit union, national securities exchange
or savings association. A signature guarantee is not required for redemptions of
$10,000 or less, requested by and payable to all stockholders of record for an
account, to be sent to the address of record. SMC reserves the right to reject
any signature guarantee pursuant to its written procedures which may be revised
in the future. To avoid delay in redemption or transfer, stockholders having
questions should contact SMC by calling 1-800-643-8188.
The redemption price will be the net asset value of the shares next
computed after the redemption request in proper order is received by SMC.
Payment of the amount due on redemption, less any applicable deferred sales
charge, will be made by check, or by wire at the sole discretion of SMC, within
seven days after receipt of the redemption request in proper order. If a wire
transfer is requested, SMC must be provided with the name and address of the
stockholder's bank as well as the account number to which payment is to be
wired. Checks will be mailed to the stockholder's registered address (or as
otherwise directed). Remittance by wire (to a commercial bank account in the
same name(s) as the shares are registered), by certified or cashier's check, or
by express mail, if requested, will be at a charge of $15, which will be
deducted from the redemption proceeds.
In addition to the foregoing redemption procedures, the Series repurchase
shares from broker/dealers at the price determined as of the close of business
on the day such offer is confirmed. Dealers may charge a commission on the
repurchase of shares.
At various times, requests may be made to redeem shares for which good
payment has not yet been received. Accordingly, payment of redemption proceeds
may be delayed until such time as good payment has been collected for the
purchase of the shares in question, which may take up to 15 days from the
purchase date.
Requests also may be made to redeem shares in an account for which the
stockholder's tax identification number has not been provided. To the extent
permitted by law, the redemption proceeds from such an account will be reduced
by $50 to reimburse for the penalty imposed by the Internal Revenue Service for
failure to report the tax identification number.
TELEPHONE REDEMPTIONS
Stockholders may redeem uncertificated shares in amounts up to $10,000 by
telephone request, provided that the stockholder has completed the Telephone
Redemption section of the application or a Telephone Redemption form which may
be obtained from SMC. The proceeds of a telephone redemption will be sent to the
stockholder at his or her address as set forth in the application or in a
subsequent written authorization with a signature guarantee. Once authorization
has been received by SMC, a stockholder may redeem shares by calling the Series
at 1-800-643-8188, on weekdays (except holidays) between the hours of 7:00 a.m.
and 6:00 p.m. Central time. Telephone redemptions are not accepted for IRA and
403(b)(7) accounts. Redemption requests received by telephone after the close of
the New York Stock Exchange (normally 3 p.m. Central time) will be treated as if
received on the next business day. A stockholder who authorizes telephone
redemptions authorizes SMC to act upon the instructions of any person
identifying themselves as the owner of an account or the owner's broker. SMC has
established procedures to confirm that instructions communicated by telephone
are genuine and will be liable for any losses due to fraudulent or unauthorized
instructions if it fails to comply with its procedures. SMC's procedures require
that any
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person requesting a telephone redemption provide the account registration and
number and the owner's tax identification number, and such instructions must be
received on a recorded line. Neither the Fund, SMC, nor the Distributor shall be
liable for any loss, liability, cost or expense arising out of any redemption
request, provided SMC complied with its procedures. Thus, a stockholder who
authorizes telephone redemptions may bear the risk of loss from a fraudulent or
unauthorized request. The telephone redemption privilege may be changed or
discontinued at any time by SMC or the Fund.
During periods of severe market or economic conditions, telephone
redemptions may be difficult to implement and stockholders should make
redemptions by mail as described in "How to Redeem Shares" on page 35.
DIVIDENDS AND TAXES
It is the policy of the Global High Yield Series to pay dividends from net
investment income quarterly and to distribute realized capital gains (if any) in
excess of any capital losses and capital loss carryovers, at least once a year.
The other Series expect to distribute, at least once a year, substantially all
of the Series' net investment income and net realized capital gains. Because
Class A shares of the Series bear most of the costs of distribution of such
shares through payment of a front-end sales charge, while Class B shares of the
Series bear such costs through a higher distribution fee, expenses attributable
to Class B shares, generally, will be higher and as a result, income
distributions paid by the Series with respect to Class B shares generally will
be lower than those paid with respect to Class A shares. Any such dividend
payment or capital gains distribution will result in a decrease of the net asset
value of the shares in an amount equal to the payment or distribution. All
dividends and distributions are automatically reinvested on the payable date in
shares of the Series at net asset value as of the record date (reduced by an
amount equal to the amount of the dividend or distribution) unless SMC is
previously notified in writing by the stockholder that such dividends or
distributions are to be received in cash. A stockholder also may request that
such dividends or distributions be directly deposited to the stockholder's bank
account. Dividends or distributions paid with respect to Class A shares and
received in cash may, within 30 days of the payment date, be reinvested without
a sales charge.
Each Series is to be treated separately in determining the amounts of
income and capital gains distributions. For this purpose, each Series will
reflect only the income and gains, net of losses, of that Series.
Certain requirements relating to the qualification of a Series as a
regulated investment company may limit the extent to which a Series will be able
to engage in certain investment practices, including transactions in options,
futures contracts, forwards, swaps and other types of derivative securities
transactions. In addition, if a Series were unable to dispose of portfolio
securities due to settlement problems relating to foreign investments or due to
the holding of illiquid securities, the Series' ability to qualify as a
regulated investment company might be affected.
The Series will not pay dividends or distributions of less than $25 in cash
but will automatically reinvest them.
Each of the Series intends to qualify as a "regulated investment company"
under the Internal Revenue Code. Such qualification generally removes the
liability for federal income taxes from the Series, and makes federal income tax
upon income and capital gains generated by a Series' investments, the sole
responsibility of its stockholders provided the Series continues to so qualify
and distributes all of its net investment income and net realized capital gain
to its
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stockholders. Furthermore, the Series generally will not be subject to excise
taxes imposed on certain regulated investment companies provided that each
Series distributes 98 percent of its ordinary income and 98 percent of its net
capital gain income each year.
Distributions of net investment income and realized net short-term capital
gain by the Series are taxable to stockholders as ordinary income whether
received in cash or reinvested in additional shares. Distributions (designated
by the Series as "capital gain dividends") of the excess, if any, of net
long-term capital gains over net short-term capital losses are taxable to
stockholders as long-term capital gain regardless of how long a stockholder has
held the Series' shares and regardless of whether received in cash or reinvested
in additional shares.
At December 31, 1996, Global High Yield Series had accumulated net realized
losses on sales of investments in the amount of $99,652.
Certain dividends declared in October, November or December of a calendar
year are taxable to stockholders as though received on December 31 of that year
if paid to stockholders during January of the following calendar year.
Advice as to each year's taxable dividends and distributions, if
applicable, will be mailed on or before January 31 of the following year.
Stockholders should consult their tax adviser to determine the effect of
federal, state and local tax consequences to them from an investment in the
Series.
The Series are required by law to withhold 31 percent of taxable dividends
and distributions (including redemption proceeds) to stockholders who do not
furnish their correct taxpayer identification numbers, or are otherwise subject
to the backup withholding provisions of the Internal Revenue Code.
FOREIGN TAXES
Investment income and gains received from sources within foreign countries
may be subject to foreign income and other taxes. In this regard, withholding
tax rates in countries with which the United States does not have a tax treaty
are often as high as 30 percent or more. The United States has entered into tax
treaties with many foreign countries which entitle certain investors to a
reduced tax rate (generally 10 to 15 percent) or to exemptions from tax. If
applicable, the Series will operate so as to qualify for such reduced tax rates
or tax exemptions whenever possible. While stockholders of the Series will
indirectly bear the cost of any foreign tax withholding, they will not be able
to claim foreign tax credit or deduction for taxes paid by the Series.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Series is determined as of the close
of regular trading hours on the New York Stock Exchange (normally 3 p.m. Central
time) on each day that the Exchange is open for trading. The determination is
made by dividing the value of the portfolio securities of each Series plus any
cash or other assets, less all liabilities, by the number of shares outstanding
of the Series.
Securities which are listed or traded on a national securities exchange are
valued at the last sale price. If there are no sales on a particular day, then
the securities are valued at the last bid price. All other securities for which
market quotations are readily available are valued on the basis of the last
current bid price. If there is no bid price or if the bid price is deemed to be
unsatisfactory by the Board of Directors or by SMC, then the securities are
valued in good faith by such method as the Board of Directors determines will
reflect the fair market value.
The Fund's officers, under the general supervision of its Board of
Directors, will regularly
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review procedures used by, and valuations provided by, the pricing service.
Because the expenses of distribution are borne by Class A shares of the
Series through a front-end sales charge and by Class B shares of such Series
through an ongoing distribution fee, the expenses attributable to each class of
shares will differ, resulting in different net asset values. The net asset value
of Class B shares will generally be lower than the net asset value of Class A
shares as a result of the distribution fee charged to Class B shares. It is
expected, however, that the net asset value per share will tend to converge
immediately after the payment of dividends which will differ in amount for Class
A and B shares by approximately the amount of the different distribution
expenses attributable to Class A and B shares.
PERFORMANCE
The Series may, from time to time, include performance data in
advertisements or reports to stockholders or prospective investors. Such
performance data may include quotations of "yield," "average annual total
return" and "aggregate total return."
Yield is based on the investment income per share earned during a
particular 30-day period (including dividends and interest), less expenses
accrued during the period ("net investment income"), and will be computed by
dividing net investment income per share by the maximum public offering price
per share on the last day of the period.
Average annual total return will be expressed in terms of the average
annual compounded rate of return of a hypothetical investment in the Series over
periods of one, five and ten years (up to the life of the Series). Such average
annual total return figures will reflect the deduction of the maximum sales
charge and a proportional share of Series expenses on an annual basis, and will
assume that all dividends and distributions are reinvested when paid.
Aggregate total return will be calculated for any specified period by
assuming a hypothetical investment in the Series on the date of the commencement
of the period and assuming that all dividends and distributions are reinvested
when paid. The net increase or decrease in the value of the investment over the
period will be divided by its beginning value to arrive at aggregate total
return.
Quotations of performance reflect only the performance of a hypothetical
investment in a Series during the particular time period on which the
calculations are based. Such quotations for the Series will vary based on
changes in market conditions and the level of the Series' expenses, and no
reported performance figure should be considered an indication of performance
which may be expected in the future.
In connection with communicating performance to current or prospective
stockholders, the Series also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or other unmanaged
indexes which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses. The Series will
include performance data for both Class A and Class B shares of the Series in
any advertisement or report including performance data of the Series.
For a more detailed description of the methods used to calculate
performance, see the Series' Statement of Additional Information.
STOCKHOLDER SERVICES
ACCUMULATION PLAN
An investor in the Series may choose to begin a voluntary Accumulation
Plan. This allows for an initial investment of $100 minimum and subsequent
investments of $20 minimum at any
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time. An Accumulation Plan involves no obligation to make periodic investments
and is terminable at will.
Payments are made by sending a check to the Distributor who (acting as an
agent for the dealer) will purchase whole and fractional Series shares as of the
close of business on such day as the payment is received. The investor will
receive a confirmation and statement after each investment. Investors may choose
to use "Secur-O-Matic" (automatic bank draft) to make their Series purchases.
There is no additional charge for choosing to use Secur-O-Matic. An application
may be obtained by writing Security Distributors, Inc., 700 SW Harrison Street,
Topeka, Kansas 66636-0001 or by calling (800) 643-8188.
SYSTEMATIC WITHDRAWAL PROGRAM
Stockholders who wish to receive regular payments of $25 or more may
establish a Systematic Withdrawal Program. Liquidation in this manner will be
allowed only if shares with a current offering price of $5,000 or more are
deposited with SMC, which will act as agent for the stockholder under the
program. Payments are available on a monthly, quarterly, semiannual or annual
basis. Shares are liquidated at net asset value. The stockholder will receive a
confirmation following each transaction. The program may be terminated on
written notice, or it will terminate automatically if all shares are liquidated
or withdrawn from the account.
A stockholder may establish a Systematic Withdrawal Program with respect to
Class B shares without the imposition of any applicable contingent deferred
sales charge, provided that such withdrawals do not in any 12-month period,
beginning on the date the Program is established, exceed 10 percent of the value
of the account on that date ("Free Systematic Withdrawals"). Free Systematic
Withdrawals are not available if a Program established with respect to Class B
shares provides for withdrawals in excess of 10 percent of the value of the
account in any Program year and, as a result, all withdrawals under such a
Program would be subject to any applicable contingent deferred sales charge.
Free Systematic Withdrawals will be made first by redeeming those shares that
are not subject to the contingent deferred sales charge and then by redeeming
shares held the longest. The contingent deferred sales charge applicable to a
redemption of Class B shares requested while Free Systematic Withdrawals are
being made will be calculated as described under "Calculation and Waiver of
Contingent Deferred Sales Charges," page 33. A Systematic Withdrawal form may be
obtained from the Series.
EXCHANGE PRIVILEGE
Stockholders who own shares of the Series may exchange those shares for
shares of another of the Series or for shares of other mutual funds distributed
by the Distributor (the "Security Funds"). Exchanges may be made only in those
states where shares of the Series or the Security Fund into which an exchange is
to be made are qualified for sale. No service fee is presently imposed on such
an exchange. Class A and Class B shares of the Series may be exchanged for Class
A and Class B shares, respectively, of another Series or the Security Fund. Any
applicable contingent deferred sales charge will be calculated from the date of
the initial purchase. Exchanges of Class A shares are made at net asset value
without a front-end sales charge.
For tax purposes, an exchange is a sale of shares which may result in a
taxable gain or loss. Special rules may apply to determine the amount of gain or
loss on an exchange occurring within ninety days after the exchanged shares were
acquired.
Exchanges are made upon receipt of a properly completed Exchange
Authorization form. This privilege may be changed or discontinued at any time at
the discretion of the management of
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the Fund upon 60 days' notice to stockholders. A current prospectus of the
Series into which an exchange is made will be given to each stockholder
exercising this privilege.
EXCHANGE BY TELEPHONE
To exchange shares by telephone, a stockholder must hold shares in
non-certificate form and must either have completed the Telephone Exchange
section of the application or a Telephone Transfer Authorization form which may
be obtained from SMC. Once authorization has been received by SMC, a stockholder
may exchange shares by telephone by calling the Funds at 1-800-643-8188, on
weekdays (except holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central
time. Exchange requests received by telephone after the close of the New York
Stock Exchange (normally 3 p.m. Central time) will be treated as if received on
the next business day.
A stockholder who authorizes telephone exchanges authorizes SMC to act upon
the instructions of any person by telephone to exchange shares between any
identically registered accounts with the Series. SMC has established procedures
to confirm that instructions communicated by telephone are genuine and will be
liable for any losses due to fraudulent or unauthorized instructions if it fails
to comply with its procedures. SMC's procedures require that any person
requesting an exchange by telephone provide the account registration and number
and the owner's tax identification number and such instructions must be received
on a recorded line. Neither the Fund, SMC nor the Distributor will be liable for
any loss, liability, cost or expense arising out of any request, including any
fraudulent request, provided SMC complied with its procedures. Thus, a
stockholder who authorizes telephone exchanges may bear the risk of loss from a
fraudulent or unauthorized request.
In periods of severe market or economic conditions, the telephone exchange
of shares may be difficult to implement and stockholders should make exchanges
by writing to Security Distributors, Inc., 700 Harrison Street, Topeka, Kansas
66636-0001. The telephone exchange privilege may be changed or discontinued at
any time at the discretion of the management of the Fund.
RETIREMENT PLANS
The Series have available tax-qualified retirement plans for individuals,
prototype plans for the self-employed, pension and profit sharing plans for
corporations and custodial accounts for employees of public school systems and
organizations meeting the requirements of Section 501(c)(3) of the Internal
Revenue Code. Further information concerning these plans is contained in the
Series' Statement of Additional Information.
GENERAL INFORMATION
ORGANIZATION
The Articles of Incorporation of the Fund provide for the issuance of an
indefinite number of shares of capital stock in one or more classes or series.
The Fund has authorized capital stock of $1.00 par value. Its shares are
currently issued in seven series: Emerging Markets Total Return, Global Asset
Allocation, Global High Yield, Corporate Bond, Limited Maturity Bond, U.S.
Government, and High Yield Series. The shares of each series represent a pro
rata beneficial interest in that series' net assets and in the earnings and
profits or losses derived from the investment of such assets.
Each of the Series currently issues two classes of shares which participate
proportionately based on their relative net asset values in dividends and
distributions and have equal voting, liquidation and other rights except that
(i) expenses related to
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the distribution of each class of shares or other expenses that the Board of
Directors may designate as class expenses from time to time, are borne solely by
each class; (ii) each class of shares has exclusive voting rights with respect
to any Distribution Plan adopted for that class; (iii) each class has different
exchange privileges; and (iv) each class has a different designation.
When issued and paid for, each Series' shares will be fully paid and
nonassessable by the Series. Shares may be exchanged as described above under
"Exchange Privilege," but will have no other preference, conversion, exchange or
preemptive rights. Shares are transferable, redeemable and assignable and have
cumulative voting privileges for the election of directors.
On certain matters, such as the election of directors, all shares of each
series of the Fund vote together, with each share having one vote. On other
matters affecting a particular series, such as the Investment Advisory Contract
or the fundamental investment policies, only shares of that series are entitled
to vote, and a majority vote of the shares of that series is required for
approval of the proposal.
The Fund does not generally hold annual meetings of stockholders and will
do so only when required by law. Stockholders may remove directors from office
by votes cast in person or by proxy at a meeting of stockholders. Such a meeting
will be called at the written request of the holders of 10 percent of the Fund's
outstanding shares.
STOCKHOLDER INQUIRIES
Stockholders who have questions concerning their account or wish to obtain
additional information may write to the Series at 700 SW Harrison Street,
Topeka, Kansas 66636-0001, or call 1-800-643-8188.
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PROSPECTUS APPENDIX A
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APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
AAA -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other market
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category. The modifier 2 indicates
a mid-range ranking, and modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
STANDARD & POOR'S CORPORATION
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
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of changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C -- The rating C is reserved for income bonds in which no interest is
being paid. D -- Debt rated D is in default and payment of interest and/or
repayment of principal is in arrears.
NOTE: Standard & Poor's ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major categories.
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APPENDIX B
REDUCED SALES CHARGES
CLASS A SHARES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Series.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or a Statement of Intention (also referred to
as a "Letter of Intent"), the term "Purchaser" includes the following persons:
an individual; an individual, his or her spouse and children under the age of
21; a trustee or other fiduciary of a single trust estate or single fiduciary
account established for their benefit; an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Internal Revenue Code; or a
pension, profit-sharing or other employee benefit plan whether or not qualified
under Section 401 of the Internal Revenue Code.
RIGHTS OF ACCUMULATION
To reduce sales charges on purchases of Class A shares of the Series a
Purchaser may combine all previous purchases of the Series with a contemplated
current purchase and receive the reduced applicable front end sales charge. The
Distributor must be notified when a sale takes place which might qualify for the
reduced charge on the basis of previous purchases.
Rights of accumulation also apply to purchases representing the Class A shares
of a Series and one or more of the other Series in those states where shares of
the Series being purchased are qualified for sale.
STATEMENT OF INTENTION
A Purchaser of the Series may choose to sign a Statement of Intention
within 90 days after the first purchase to be included thereunder, which will
cover future purchases of Class A shares of the Series. The amount of these
future purchases shall be specified and must be made within a 13-month period
(or 36-month period for purchases of $1 million or more) to become eligible for
the reduced front-end sales charge applicable to the actual amount purchased
under the statement. Five percent (5%) of the amount specified in the Statement
of Intention will be held in escrow shares until the Statement is completed or
terminated. These shares may be redeemed by the Series if the Purchaser is
required to pay additional sales charges. Any dividends paid by the Series will
be payable with respect to escrow shares. The Purchaser bears the risk that the
escrow shares may decrease in value.
A Statement of Intention may be revised during the 13-month (or, if
applicable, 36-month) period. Additional shares received from reinvestment of
income dividends and capital gains distributions are included in the total
amount used to determine reduced sales charges.
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of the Series have a one-time
privilege (1) to reinstate their accounts by purchasing shares without a sales
charge up to the dollar amount of the redemption proceeds; or (2) to the extent
the redeemed shares would have been eligible for the exchange privilege, to
purchase shares of another of the Series, without a sales charge up to the
dollar amount of the redemption proceeds. To exercise this privilege, a
stockholder must provide written notice and the amount to be reinvested to the
Series within 30 days after the redemption request.
The reinstatement or exchange will be made at the net asset value next
determined after the reinvestment is received by the Series.
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45
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SECURITY INCOME FUND
o CORPORATE BOND SERIES
o LIMITED MATURITY BOND SERIES
o U.S. GOVERNMENT SERIES
o HIGH YIELD SERIES
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
RELATING TO THE PROSPECTUS DATED MAY 1, 1997,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
(913) 295-3127
(800) 888-2461
- --------------------------------------------------------------------------------
INVESTMENT MANAGER
Security Management Company, LLC
700 SW Harrison Street
Topeka, Kansas 66636-0001
DISTRIBUTOR
Security Distributors, Inc.
700 SW Harrison Street
Topeka, Kansas 66636-0001
CUSTODIAN
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64106
INDEPENDENT AUDITORS
Ernst & Young LLP
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105-2143
<PAGE>
SECURITY INCOME FUND
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
Members of The Security Benefit Group of Companies
700 SW Harrison, Topeka, Kansas 66636-0001
STATEMENT OF
ADDITIONAL INFORMATION
May 1, 1997
(RELATING TO THE PROSPECTUS DATED MAY 1, 1997,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME)
This Statement of Additional Information is not a Prospectus. It should be
read in conjunction with the Prospectus dated May 1, 1997, as it may be
supplemented from time to time. A Prospectus may be obtained by writing or
calling Security Distributors, Inc., 700 SW Harrison, Topeka, Kansas 66636-0001,
or by calling (913) 295-3127 or (800) 888-2461, ext. 3127.
TABLE OF CONTENTS
Page
General Information..................................... 1
Investment Objectives and Policies of the Funds......... 2
Security Income Fund................................. 2
Corporate Bond Fund................................ 2
Limited Maturity Bond Fund......................... 3
U.S. Government Fund............................... 5
High Yield Fund.................................... 6
Security Tax-Exempt Fund............................. 8
Security Cash Fund................................... 12
Investment Methods and Risk Factors..................... 14
Investment Policy Limitations........................... 25
Income Fund's Fundamental Policies................... 26
Tax-Exempt Fund's Fundamental Policies............... 27
Cash Fund's Fundamental Policies..................... 28
Officers and Directors.................................. 29
Remuneration of Directors and Others.................... 31
How to Purchase Shares.................................. 31
Corporate Bond, Limited Maturity Bond,
U.S. Government, High Yield and
Tax-Exempt Funds................................... 31
Alternative Purchase Options......................... 32
Class A Shares....................................... 32
Security Income Fund's Class A Distribution Plan..... 33
Class B Shares....................................... 34
Class B Distribution Plan............................ 34
Calculation and Waiver of Contingent Deferred Sales
Charges............................................ 35
Arrangements With Broker/Dealers and Others........ 35
Cash Fund.......................................... 36
Purchases at Net Asset Value............................ 37
Accumulation Plan....................................... 38
Systematic Withdrawal Program........................... 38
Investment Management................................... 38
Portfolio Management................................. 40
Code of Ethics....................................... 41
Distributor............................................. 41
Allocation of Portfolio Brokerage....................... 42
Determination of Net Asset Value........................ 43
How to Redeem Shares.................................... 44
Telephone Redemptions................................ 46
How to Exchange Shares.................................. 46
Exchange by Telephone................................ 47
Dividends and Taxes..................................... 47
Organization............................................ 51
Custodian, Transfer Agent and Dividend-Paying Agent..... 52
Independent Auditors.................................... 52
Performance Information................................. 52
Retirement Plans........................................ 54
Individual Retirement Accounts (IRAs)................... 55
SIMPLE IRAs............................................. 55
Pension and Profit-Sharing Plans........................ 56
403(b) Retirement Plans................................. 56
Simplified Employee Pension Plans (SEPPs)............... 56
Financial Statements.................................... 56
Tax-Exempt vs. Taxable Income........................... 57
Appendix A.............................................. 58
<PAGE>
GENERAL INFORMATION
Security Income Fund, Security Tax-Exempt Fund and Security Cash Fund,
which were organized as Kansas corporations on April 20, 1965, July 14, 1981 and
March 21, 1980, respectively, are registered with the Securities and Exchange
Commission as investment companies. Such registration does not involve
supervision by the Securities and Exchange Commission of the management or
policies of the Funds. The Funds are diversified, open-end management investment
companies that, upon the demand of the investor, must redeem their shares and
pay the investor the current net asset value thereof. ( See "How to Redeem
Shares," page 44.)
Each of the Corporate Bond Series ("Corporate Bond Fund"), Limited Maturity
Bond Series ("Limited Maturity Bond Fund"), U.S. Government Series ("U.S.
Government Fund") and High Yield Series ("High Yield Fund") of Security Income
Fund, Security Tax-Exempt Fund ("Tax-Exempt Fund"), and Security Cash Fund
("Cash Fund") (the "Funds") has its own investment objective and policies which
are described below. While there is no present intention to do so, the
investment objective and policies of each Fund, unless otherwise noted, may be
changed by its Board of Directors without the approval of stockholders. Each of
the Funds is also required to operate within limitations imposed by its
fundamental investment policies which may not be changed without stockholder
approval. These limitations are set forth below under "Investment Policy
Limitations," page 25. An investment in one of the Funds does not constitute a
complete investment program.
The value of the shares of each Fund fluctuates with the value of the
portfolio securities. Each Fund may realize losses or gains when it sells
portfolio securities and will earn income to the extent that it receives
dividends or interest from its investments. (See "Dividends and Taxes," page
47.)
The shares of Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield and Tax-Exempt Funds are sold to the public at net asset value, plus a
sales commission which is divided between the principal distributor and dealers
who sell the shares ("Class A shares"), or at net asset value with a contingent
deferred sales charge ("Class B shares"). The shares of Cash Fund are sold to
the public at net asset value. There is no sales charge or load when purchasing
shares of Cash Fund. (See "How to Purchase Shares," page 31.)
The Funds receive investment advisory, administrative, accounting, and
transfer agency services from Security Management Company, LLC (the "Investment
Manager") for a fee. The Investment Manager has guaranteed that the aggregate
annual expenses (including the management compensation but excluding brokerage
commissions, interest, taxes, extraordinary expenses and Class B distribution
fees) shall not for Corporate Bond, Limited Maturity Bond, U.S. Government and
High Yield Funds exceed any expense limitation imposed by any state and shall
not for Tax-Exempt and Cash Funds exceed 1% of the average net assets of the
Fund for the year. (See page 38 for a discussion of the Investment Manager and
the Investment Advisory Contract.)
Each Fund will pay all its expenses not assumed by the Investment Manager
or Security Distributors, Inc. (the "Distributor") including organization
expenses; directors' fees; fees of custodian; taxes and governmental fees;
interest charges; any membership dues; brokerage commissions; expenses of
preparing and distributing reports to stockholders; costs of stockholder and
other meetings; and legal, auditing and accounting expenses. Each Fund will also
pay for the preparation and distribution of the prospectus to its stockholders
and all expenses in connection with its registration under the Investment
Company Act of 1940 and the registration of its capital stock under federal and
state securities laws. Each Fund will pay nonrecurring expenses as may arise,
including litigation expenses affecting it.
Under a Distribution Plan adopted with respect to the Class A shares of
Corporate Bond, Limited Maturity Bond, U.S. Government and High Yield Funds
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "1940
Act"), these Funds are authorized to pay to the Distributor, an annual fee of
.25% of the average daily net assets of the Class A shares of the Corporate
Bond, Limited Maturity Bond, U.S. Government and High Yield Funds to finance
various distribution-related activities. (See "Security Income Fund's Class A
Distribution Plan," page 33.)
Under Distribution Plans adopted with respect to the Class B shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Tax-Exempt Funds pursuant to Rule 12b-1 under the 1940 Act, each Fund is
authorized to pay to the Distributor, an annual fee of 1.00% of the average
daily net assets of the Class B Shares of the respective Funds to finance
various distribution-related activities. (See "Class B Distribution Plan," page
34.)
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The Funds may utilize short-term trading to a limited extent in order to
take advantage of differentials in bond yields consistent with their respective
investment objectives. The portfolio turnover rate for the Funds' Class A and B
shares of Corporate Bond, U.S. Government, Limited Maturity Bond and Tax-Exempt
Funds for the fiscal year ended December 31, 1996, was: Corporate Bond - 292%;
U.S. Government - 75%; Limited Maturity Bond -105%; and Tax-Exempt - 54%. The
portfolio turnover rate for the Funds' Class A and B shares for the fiscal year
ended December 31, 1995 was: Corporate Bond - 200%; U.S. Government - 81%; and
Tax-Exempt - 103%. The annualized portfolio turnover rate for the Class A and B
shares of High Yield Fund for the period August 5, 1996 (date of inception) to
December 31, 1996 was 168%. The annualized portfolio turnover rate for the Class
A and B shares of Limited Maturity Bond Fund for the period January 17, 1995
(date of inception) to December 31, 1995 was 4%. Portfolio turnover is the
percentage of the lower of security sales or purchases to the average portfolio
value and would be 100% if all securities in the Fund were replaced within a
period of one year.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
SECURITY INCOME FUND
Security Income Fund ("Income Fund") consists of seven diversified Series
(Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield, MFR
Emerging Markets Total Return, MFR Global Asset Allocation and MFR Global High
Yield (formerly Global Aggressive Bond) Funds), each of which represents a
different investment objective and which has its own identified assets and net
asset values. The investment objectives of Corporate Bond, Limited Maturity
Bond, U.S. Government and High Yield Funds are each described below. There are
risks inherent in the ownership of any security and there can be no assurance
that such investment objectives will be achieved. Some of the risks are
described below.
Corporate Bond, Limited Maturity Bond and U.S. Government Funds will
purchase solely debt securities and will not invest in securities which are not
publicly traded or marketable. Short-term obligations may be purchased in any
amount as the Investment Manager deems appropriate for defensive or liquidity
purposes. Each Fund's portfolio may include a significant amount of debt
securities which sell at discounts from their face amount as a result of current
market conditions. For example, debt securities with fixed-rate coupons are
generally sold at a discount from their face amount during periods of rising
interest rates.
Income Fund makes no representation that the stated investment objective of
any Series will be achieved. Although there is no present intention to do so,
the investment objective of any Series of the Fund may be altered by the Board
of Directors without the approval of stockholders of the Series.
CORPORATE BOND FUND
The investment objective of the Corporate Bond Fund is to conserve capital
while generating interest income. In pursuing its investment objective, the Fund
will invest in a broad range of debt securities, including (i) securities issued
by U.S. and Canadian corporations; (ii) securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars; (v)
higher yielding, high risk debt securities (commonly referred to as "junk
bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign bank
("Yankee CDs"); (vii) investment grade mortgage-backed securities ("MBSs"); and
(viii) zero coupon securities. Under normal circumstances, at least 65% of the
Fund's total assets will be invested in corporate debt securities which at the
time of issuance have a maturity greater than one year.
Corporate Bond Fund will invest primarily in corporate debt securities
rated Baa or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or
higher by Standard & Poor's Corporation ("S&P") at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. See
Appendix A to the Prospectus for a description of corporate bond ratings.
Included in such securities may be convertible bonds or bonds with warrants
attached which are rated at least Baa or BBB at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. A
"convertible bond" is a bond, debenture or preferred share which may be
exchanged by the owner for common stock or another security, usually of the same
company, in accordance with the terms of the issue. A "warrant" confers upon its
holder the right to purchase an amount of securities at a particular time and
price. Securities rated Baa by Moody's or BBB by S&P have
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<PAGE>
speculative characteristics. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with such securities.
Corporate Bond Fund may invest up to 25% of its net assets in higher
yielding debt securities in the lower rating (higher risk) categories of the
recognized rating services (commonly referred to as "junk bonds"). Such
securities include securities rated Ba or lower by Moody's or BB or lower by S&P
and are regarded as predominantly speculative with respect to the ability of the
issuer to meet principal and interest payments. The Fund will not invest in junk
bonds which are rated in default at the time of purchase. See "Investment
Methods and Risk Factors" for a discussion of the risks associated with
investing in such securities.
The Fund may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars.
The Fund may invest in Yankee CDs which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
U.S. Yankee CDs are subject to somewhat different risks than are the obligations
of domestic banks. The Fund also may invest in debt securities issued by foreign
governments, their agencies and instrumentalities and foreign corporations,
provided that such securities are denominated in U.S. dollars. The Fund's
investment in foreign securities, including Canadian securities, will not exceed
25% of the Fund's net assets. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with investing in foreign securities. The
Fund may also invest in zero coupon securities which are debt securities that
pay no cash income but are sold at substantial discounts from their face value.
Certain zero coupon securities also provide for the commencement of regular
interest payments at a deferred date.
The Fund may invest in investment grade mortgage-backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund may invest up to 10% of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) or "principal-only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs. The
Fund will hold less than 25% of its net assets in MBSs. For a discussion of MBSs
and the risks associated with such securities, see "Investment Methods and Risk
Factors."
Corporate Bond Fund may purchase securities on a "when issued" or "delayed
delivery" basis in excess of customary settlement periods for the types of
security involved. For a discussion of such securities, see "Investment Methods
and Risk Factors." It is anticipated that securities invested in by this Fund
will be held by the Fund on an average from one and a half to three years and
that the average weighted maturity of the Fund's portfolio will range from 10 to
25 years under normal circumstances.
Corporate Bond Fund may invest in repurchase agreements on an overnight
basis. See the discussion of repurchase agreements under "Investment Methods and
Risk Factors." The Fund may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. Borrowing is discussed
in more detail under "Investment Methods and Risk Factors." Pending investment
in securities or to meet potential redemptions, the Fund may invest in
certificates of deposit, bank demand accounts and high quality money market
instruments.
LIMITED MATURITY BOND FUND
The investment objective of the Limited Maturity Bond Fund is to seek a
high level of income consistent with moderate price fluctuation by investing
primarily in short- and intermediate-term bonds. As used herein the term "short-
and intermediate-term bonds" is used to describe any debt security with a
maturity of 15 years or less. In pursuing its investment objective, the Fund
will invest in a broad range of debt securities, including (i) securities issued
by U.S. and Canadian corporations; (ii) securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by, the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies, and instrumentalities, and
foreign corporations, provided that such securities are denominated in U.S.
dollars; (v) higher yielding, high risk debt securities (commonly referred to as
"junk bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign
bank ("Yankee CDs"); (vii) mortgage-backed securities ("MBSs"); (viii)
investment grade asset-backed securities; and (ix) zero coupon securities. High
yield debt securities, Yankee CDs, MBSs and asset-backed securities are
described in further detail under "Investment Methods and Risk Factors." Under
normal circumstances, the Fund will invest at least 65% of the
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<PAGE>
value of its total assets in short- and intermediate-term bonds. It is
anticipated that the Fund's dollar weighted average maturity will range from 2
to 10 years. It will never exceed 10 years.
Limited Maturity Bond Fund will invest primarily in debt securities rated
Baa or higher by Moody's or BBB or higher by S&P at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. Baa
securities are considered to be "medium grade" obligations by Moody's and BBB is
the lowest classification which is still considered an "investment grade" rating
by S&P. Included in such securities may be convertible bonds or bonds with
warrants attached which are rated at least Baa or BBB at the time of purchase,
or if unrated, of equivalent quality as determined by the Investment Manager. A
"convertible bond" is a bond, debenture or preferred share which may be
exchanged, by the owner, for common stock or another security, usually of the
same company, in accordance with the terms of the issue. A "warrant" confers
upon its holder the right to purchase an amount of securities at a particular
time and price. Bonds rated Baa by Moody's or BBB by S&P have speculative
characteristics and may be more susceptible than higher grade bonds to adverse
economic conditions or other adverse circumstances which may result in a
weakened capacity to make principal and interest payments. See Appendix A to the
Prospectus for a description of corporate bond ratings.
The Fund may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"); however, the Fund will never hold more than 25% of its net
assets in junk bonds. This includes securities rated Ba or lower by Moody's or
BB or lower by S&P and are regarded as predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. The Fund will
not invest in junk bonds which are in default at the time of purchase. However,
the Investment Manager will not rely principally on the ratings assigned by the
rating services. Because the Fund may invest in lower rated or unrated
securities of comparable quality, the achievement of the Fund's investment
objective may be more dependent on the Investment Manager's own credit analysis
than would be true if investing in higher rated securities.
The Fund may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. currency.
The Fund may invest in Yankee CDs which are Certificates of Deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States. Yankee CDs are subject to somewhat different risks than are the
obligations of domestic banks. The Fund may also invest up to 25% of its net
assets in debt securities issued by foreign governments, their agencies and
instrumentalities, and foreign corporations, provided that such securities are
denominated in U.S. dollars. The Fund's investment in foreign securities,
including Canadian securities will not exceed 25% of the Fund's net assets.
Investment in securities of foreign issuers presents certain risks, including
future political and economic developments and the possible imposition of
foreign governmental laws and restrictions, reduced availability of public
information concerning issuers, and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic issuers.
The Fund may invest in U.S. Government securities. Some U.S. Government
securities, such as Treasury bills and bonds, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others such as those of
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. U.S. Government securities include bills, certificates of
indebtedness, notes and bonds issued by the Treasury or by agencies or
instrumentalities of the U.S. Government. The Fund may also invest in zero
coupon securities which are debt securities that pay no cash income but are sold
at substantial discounts from their face value. Certain zero coupon securities
also provide for the commencement of regular interest payments at a deferred
date.
Limited Maturity Bond Fund may acquire certain securities that are
restricted as to disposition under the federal securities laws, provided that
such securities are eligible for resale to qualified institutional investors
pursuant to Rule 144A under the Securities Act of 1933, and subject to the
Fund's policy that not more than 15% of the Fund's total assets will be invested
in illiquid assets. See "Investment Methods and Risk Factors" for a discussion
of Rule 144A Securities.
The Fund may invest in investment grade mortgage-backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund may invest up to 10% of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) and
4
<PAGE>
"principal-only" (PO) bonds, the market values of which will generally be more
volatile than the market values of most MBSs. The Fund will hold less than 25%
of its net assets in MBSs, including CMOs and mortgage pass-through securities.
The Fund may also invest in investment grade "asset-backed securities."
These include secured debt instruments backed by automobile loans, credit card
loans, home equity loans, manufactured housing loans and other types of secured
loans providing the source of both principal and interest.
Limited Maturity Bond Fund may purchase securities on a "when issued" or
"delayed delivery" basis in excess of customary settlement periods for the type
of security involved. Securities purchased on a when issued basis are subject to
market fluctuations and no interest or dividends accrue to the Fund prior to the
settlement date. The Fund will establish a segregated account with its custodian
bank in which it will maintain cash or liquid securities equal in value to
commitments for such when issued securities.
Limited Maturity Bond Fund may invest in repurchase agreements on an
overnight basis. See the discussion of repurchase agreements under "Investment
Methods and Risk Factors." The Fund may borrow money from banks as a temporary
measure for emergency purposes or to facilitate redemption requests. Borrowing
is discussed in more detail under "Investment Methods and Risk Factors." Pending
investment in securities or to meet potential redemptions, the Fund may invest
in certificates of deposit, bank demand accounts and high quality money market
instruments.
From time to time, Limited Maturity Bond Fund may invest part or all of its
assets in commercial notes or money market instruments.
U.S. GOVERNMENT FUND
The investment objective of the U.S. Government Fund is to provide a high
level of interest income with security of principal by investing primarily in
U.S. Government securities. U.S. Government securities are obligations of, or
guaranteed (as to principal and interest) by, the U.S. Government, its agencies
(such as the Federal Housing Administration and Government National Mortgage
Association) or instrumentalities (such as Federal Home Loan Banks and Federal
Land Banks), and instruments fully collateralized with such obligations such as
repurchase agreements. U.S. Government securities include bills, Certificates of
Indebtedness, notes and bonds issued by the Treasury or by agencies or
instrumentalities of the U.S. Government. The Fund may, for defensive purposes,
temporarily invest part or all of its assets in money market instruments
including deposits and bankers acceptances in depository institutions insured by
the FDIC, and short-term U.S. Government and agency securities.
Some U.S. Government securities, such as treasury bills and bonds, are
supported by the full faith and credit of the U.S. Treasury, others are
supported by the right of the issuer to borrow from the Treasury, others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. Under
normal circumstances, the Fund will invest at least 80% of the value of its
total assets in U.S. Government securities.
U.S. Government Fund may invest in repurchase agreements on an overnight
basis. See the discussion of repurchase agreements under "Investment Methods and
Risk Factors." The Fund may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. Borrowing is discussed
in more detail under "Investment Methods and Risk Factors." Pending investment
in securities or to meet potential redemptions, the Fund may invest in
certificates of deposit, bank demand accounts and high quality money market
instruments.
From time to time the portfolio of the U.S. Government Fund may consist
primarily of Government National Mortgage Association (GNMA) certificates. GNMA
certificates are mortgage-backed securities representing part ownership of a
pool of mortgage loans. These loans, issued by lenders such as mortgage bankers,
commercial banks and savings and loan associations, are either issued by the
Federal Housing Administration or guaranteed by the Veterans Administration. A
"pool" or group of such mortgages is assembled and, after being approved by
GNMA, is offered to investors through securities dealers. Once approved by GNMA,
the timely payment of interest and principal on each mortgage is guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government. GNMA
certificates differ from bonds in that principal is paid back monthly by the
borrower over the term of the loan rather than returned in a lump sum at
maturity. GNMA certificates are called "pass through"
5
<PAGE>
securities because both interest and principal payments (including prepayments)
are passed through to the holder of the certificate.
The Fund may invest in other mortgage-backed securities (MBSs) as discussed
under "Investment Methods and Risk Factors - Mortgage-Backed Securities and
Collateralized Mortgage Obligations" in the Prospectus. MBSs include certain
securities issued by the United States government or one of its agencies or
instrumentalities, such as GNMAs, or securities issued by private issuers. The
Fund may not invest more than 20% of the value of its total assets in MBSs
issued by private issuers. The Fund may also invest in zero coupon securities
which are debt securities that pay no cash income but are sold at substantial
discounts from their face value. Certain zero coupon securities also provide for
the commencement of regular interest payments at a deferred date.
The Fund will attempt to maximize the return on its portfolio by taking
advantage of market developments and yield disparities, which may include use of
the following strategies:
1. Shortening the average maturity of its portfolio in anticipation of a rise
in interest rates so as to minimize depreciation of principal;
2. Lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize appreciation of principal;
3. Selling one type of U.S. Government obligation and buying another when
disparities arise in the relative values of each; and
4. Changing from one U.S. Government obligation to an essentially similar U.S.
Government obligation when their respective yields are distorted due to
market factors.
These strategies may result in increases or decreases in the Fund's current
income available for distribution to Fund shareholders, and the Fund may hold
obligations which sell at moderate to substantial premiums or discounts from
face value. Moreover, if the Fund's expectations of changes in interest rates or
its evaluation of the normal yield relationship between two obligations proves
to be incorrect, the Fund's income, net asset value per share and potential
capital gain may be decreased or its potential capital loss may be increased. It
is anticipated that securities invested in by this Fund will be held by the Fund
on an average from three to five years.
While there is minimal credit risk involved in the purchase of U.S.
Government securities, as with any fixed income security the market value is
generally affected by changes in the level of interest rates. An increase in
interest rates will tend to reduce the market value of fixed income investments,
and a decline in interest rates will tend to increase their value. In addition,
while debt securities with longer maturities normally produce higher yields,
they are subject to potentially greater capital changes in market value than
obligations with shorter maturities.
The potential for appreciation in GNMAs and other MBSs, which might
otherwise be expected to occur as a result of a decline in interest rates, may
be limited or negated by increased principal prepayments of the underlying
mortgages. Prepayments of MBSs occur with increasing frequency when mortgage
rates decline because, among other reasons, mortgagors may be able to refinance
their outstanding mortgages at lower interest rates or prepay their existing
mortgages. Such prepayments would then be reinvested by the Fund at the lower
current interest rates.
While mortgages underlying GNMA certificates have a stated maturity of up
to 30 years, it has been the experience of the mortgage industry that the
average life of comparable mortgages, owing to prepayments, refinancings and
payments from foreclosures, is considerably less. Yield tables, published in
1981, utilize a 12-year average life assumption for GNMA pools of 26-30 year
mortgages, and GNMA certificates continue to be traded based on this assumption.
Recently it has been observed that mortgage pools issued at high interest rates
have experienced accelerated prepayment rates as interest rates decline, which
would result in a shorter average life than 12 years.
HIGH YIELD FUND
The investment objective of High Yield Fund is to seek high current income.
Capital appreciation is a secondary objective. Under normal circumstances, the
Fund will seek its investment objective by investing primarily in a broad range
of income producing securities, including (i) higher yielding, higher risk, debt
securities (commonly referred to as "junk bonds"); (ii) preferred stock; (iii)
securities issued by foreign governments, their agencies and instrumentalities,
and foreign corporations, provided that such securities are denominated in U.S.
dollars; (iv) mortgage-backed securities ("MBSs"); (v) asset-backed securities;
(vi) securities issued or guaranteed
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by the U.S. Government or any of its agencies or instrumentalities, including
Treasury bills, certificates of indebtedness, notes and bonds; (vii) securities
issued or guaranteed by, the Dominion of Canada or provinces thereof; and (viii)
zero coupon securities. The Fund may also invest up to 35% of its assets in
common stock (which may include ADRs), warrants and rights. Under normal
circumstances, at least 65% of the Fund's total assets will be invested in
high-yielding, high risk debt securities.
High Yield Fund may invest up to 100% of its assets in debt securities
that, at the time of purchase, are rated below investment grade ("high yield
securities" or "junk bonds"), which involve a high degree of risk and are
predominantly speculative. For a description of debt ratings and a discussion of
the risks associated with investing in junk bonds, see "Investment Methods and
Risk Factors." Included in the debt securities which the Fund may purchase are
convertible bonds, or bonds with warrants attached. A "convertible bond" is a
bond, debenture, or preferred share which may be exchanged by the owner for
common stock or another security, usually of the same company, in accordance
with the terms of the issue. A "warrant" confers upon the holder the right to
purchase an amount of securities at a particular time and price. See "Investment
Methods and Risk Factors" for a discussion of the risks associated with such
securities.
High Yield Fund may purchase securities which are obligations of, or
guaranteed by, the Dominion of Canada or provinces thereof and debt securities
issued by Canadian corporations. Canadian securities will not be purchased if
subject to the foreign interest equalization tax and unless payable in U.S.
dollars. The Fund may also invest in debt securities issued by foreign
governments (including Brady Bonds), their agencies and instrumentalities and
foreign corporations (including those in emerging markets), provided such
securities are denominated in U.S. dollars. The Fund's investment in foreign
securities, excluding Canadian securities, will not exceed 25% of the Fund's net
assets. See "Investment Method and Risk Factors" for a discussion of the risks
associated with investing in foreign securities and emerging markets.
High Yield Fund may invest in MBSs, including mortgage pass-through
securities and collateralized mortgage obligations (CMO's). The Fund may invest
in securities known as "inverse floating obligations," "residual interest
bonds," and "interest only" (IO) and "principal only" (PO) bonds, the market
values of which generally will be more volatile than the market values of most
MBSs. This is due to the fact that such instruments are more sensitive to
interest rate changes and to the rate of principal prepayments than are most
other MBSs. See the discussion of such instruments under "Investment Methods and
Risk Factors." The Fund will hold less than 25% of its net assets in MBSs. For a
discussion of MBSs and the risks associated with such securities, see
"Investment Methods and Risk Factors."
The Fund may also invest in "asset-backed securities." These include
secured debt instruments backed by automobile loans, credit card loans, home
equity loans, manufactured housing loans and other types of secured loans
providing the source of both principal and interest. Asset-backed securities are
subject to risks similar to those discussed with respect to MBSs. See
"Investment Methods and Risk Factors."
The Fund may invest in U.S. Government securities. U.S. Government
securities include bills, certificates of indebtedness, notes and bonds issued
by the Treasury or by agencies or instrumentalities of the U.S. Government. High
Yield Fund may also invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date.
High Yield Fund may acquire certain securities that are restricted as to
disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Fund's policy that not more than 10% of
the Fund's net assets will be invested in illiquid assets. See "Investment
Methods and Risk Factors" for a discussion of restricted securities.
The Fund may purchase securities on "when issued" or "delayed delivery"
basis in excess of customary settlement periods for the type of security
involved. The Fund may also purchase or sell securities on a "forward
commitment" basis and may enter into "repurchase agreements", "reverse
repurchase agreements" and "roll transactions." The Fund may lend securities to
broker-dealers, other institutions or other persons to earn additional income.
The value of loaned securities may not exceed 33 1/3% of the Fund's total
assets. In addition, the Fund may purchase loans, loan participations and other
types of direct indebtedness.
High Yield Fund may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or as an efficient means of
adjusting its exposure to the bond market. The Fund will not use futures
contracts for leveraging purposes. The Fund will limit its use of futures
contracts so that initial margin deposits or premiums on such contracts used for
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non-hedging purposes will not equal more than 5% of the Fund's net asset value.
The Fund may purchase call and put options and write such options on a "covered"
basis. The Fund may also enter into interest rate and index swaps and purchase
or sell related caps, floors and collars. The aggregate market value of the
Fund's portfolio securities covering call or put options will not exceed 25% of
the Fund's net assets. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with these types of investments.
As an operating policy, the Fund will not purchase securities on margin.
The Fund may, however, obtain such short-term credits as are necessary for the
clearance of purchases and sales of securities. In addition, the Fund may enter
into certain derivative transactions, consistent with its investment program,
which require the deposit of "margin" or a premium to initiate such a
transaction. As an operating policy, the Fund will not loan its assets to any
person or individual, except by the purchase of bonds or other debt obligations
customarily sold to institutional investors. The Fund may, however, lend
portfolio securities as described in the prospectus and this statement of
additional information. In addition, the Fund does not interpret this
restriction as prohibiting investment in loan participations and assignments as
described in the prospectus. As an operating policy, the Fund will not engage in
short sales.
The Fund's investment in warrants, valued at the lower of cost or market,
will not exceed 5% of the Fund's net assets. Included within this amount, but
not to exceed 2% of the Fund's net assets, may be warrants which are not listed
on the New York or American Stock Exchange. Warrants acquired by the Fund in
units or attached to securities may be deemed to be without value.
From time to time, High Yield Fund may invest part or all of its assets in
U.S. Government securities, commercial notes or money market instruments. It is
anticipated that the dollar weighted average maturity of the Fund will range
from 5 to 15 years under normal circumstances.
SECURITY TAX-EXEMPT FUND
The investment objective of Tax-Exempt Fund is to obtain as high a level of
interest income exempt from federal income taxes as is consistent with
preservation of stockholders' capital. Tax-Exempt Fund attempts to achieve its
objective by investing primarily in debt securities, the interest on which is
exempt from federal income taxes under the Internal Revenue Code including the
alternative minimum tax. There is no assurance that Tax-Exempt Fund's objective
will be achieved. Although there is no present intention to do so, the Fund's
investment objective may be changed by the Board of Directors without
stockholder approval.
The tax-exempt securities in which Tax-Exempt Fund invests include debt
obligations issued by or on behalf of the states, territories and possessions of
the United States, the District of Columbia, and their political subdivisions,
agencies, authorities and instrumentalities, including multi-state agencies or
authorities. These securities are referred to as "municipal securities" and are
described in more detail below.
Tax-Exempt Fund's investments in municipal securities are limited to
securities of "investment grade" quality, that is securities rated within the
four highest rating categories of Moody's (Aaa, Aa, A, Baa) or S&P (AAA, AA, A,
BBB), except that the Fund may purchase unrated municipal securities (i) where
the securities are guaranteed as to principal and interest by the full faith and
credit of the U.S. government or are short-term municipal securities (those
having a maturity of less than one year) of issuers having outstanding at the
time of purchase an issue of municipal bonds having one of the four highest
ratings, or (ii) where, in the opinion of the Investment Manager, the unrated
municipal securities are comparable in quality to those within the four highest
ratings. However, Tax-Exempt Fund will not purchase an unrated municipal
security (other than a security described in (i) above) if, after such purchase,
more than 20% of the Fund's total assets would be invested in such unrated
municipal securities.
With respect to rated securities, there is no percentage limitation on the
amount of Tax-Exempt Fund's assets which may be invested in securities within
any particular rating classification. A description of the ratings is contained
in Appendix B to the Prospectus. Baa securities are considered "medium grade"
obligations by Moody's, and BBB is the lowest classification which is still
considered an "investment grade" rating by S&P. Baa securities are described by
Moody's as obligations on which "interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time." According to
Moody's, "such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well." The ratings of Moody's and S&P
represent their respective opinions of the quality of the securities they
undertake to rate and such ratings are general and are not absolute standards of
quality.
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Although Tax-Exempt Fund invests primarily in municipal bonds with
maturities greater than one year, it also will invest for various purposes in
short-term (maturity equal to or less than one year) securities which, to the
extent practicable, will be short-term municipal securities. (See "Municipal
Securities," below.) Short-term investments may be made, pending investment of
funds in municipal bonds, in order to maintain liquidity to meet redemption
requests, or to maintain a temporary "defensive" investment position when, in
the opinion of the Investment Manager, it is advisable to do so on account of
current or anticipated market conditions. Except when in a temporary "defensive"
position, investments in short-term municipal securities will represent less
than 20% of the Fund's total assets.
From time to time, on a temporary basis, Tax-Exempt Fund may invest in
fixed-income obligations on which the interest is subject to federal income tax.
Except when the Fund is in a temporary "defensive" investment position, it will
not purchase a taxable security if, as a result, more than 20% of its total
assets would be invested in taxable securities. This limitation is a fundamental
policy of Tax-Exempt Fund, and may not be changed without a majority vote of the
Fund's outstanding securities. Temporary taxable investments of the Fund may
consist of obligations issued or guaranteed by the U.S. government or its
agencies or instrumentalities, commercial paper rated A-1 by S&P or Prime-1 by
Moody's, corporate obligations rated AAA or AA by S&P or Aaa or Aa by Moody's,
certificates of deposit or bankers' acceptances of domestic banks or thrifts
with at least $2 billion in assets, or repurchase agreements with such banks or
with broker/dealers. Tax-Exempt Fund may invest its assets in bank demand
accounts, pending investment in other securities or to meet potential
redemptions or expenses. Repurchase agreements may be entered into with respect
to any securities eligible for investment by the Fund, including municipal
securities. The Fund may also invest in zero coupon securities which are debt
securities that pay no cash income but are sold at substantial discounts from
their face value. Certain zero coupon securities also provide for the
commencement of regular interest payments at a deferred date.
Tax-Exempt Fund may invest in repurchase agreements which are agreements by
which a purchaser (e.g., Tax-Exempt Fund) acquires a security and simultaneously
commits to resell that security to the seller (a bank or broker/dealer) at an
agreed upon price on an agreed upon date within a number of days (usually not
more than seven) from the date of purchase. Income earned by the Fund on
repurchase agreements is not exempt from federal income tax even if the
transaction involves municipal securities. Tax-Exempt Fund may not enter into a
repurchase agreement having more than seven days remaining to maturity if, as a
result, such agreements, together with any other securities which are illiquid
or not readily marketable, would exceed 10% of the net assets of the Fund. See
the discussion of repurchase agreements under "Investment Methods and Risk
Factors."
Tax-Exempt Fund may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. Borrowing is discussed
in more detail under "Investment Methods and Risk Factors." Pending investment
in securities or to meet potential redemptions, the Fund may invest in
certificates of deposit, bank demand accounts and high quality money market
instruments.
See Appendix B to the prospectus for a further description of Moody's and
S&P ratings relating to municipal securities. As noted earlier, when Tax-Exempt
Fund is in a temporary "defensive" position, there is no limit on its
investments in short-term municipal securities and taxable securities.
MUNICIPAL SECURITIES
MUNICIPAL BONDS. Municipal bonds are debt obligations which generally have
a maturity at the time of issue in excess of one year. They are issued to obtain
funds for various public purposes, including construction of a wide range of
public facilities such as bridges, highways, housing, hospitals, mass
transportation, schools, streets, and water and sewer works. Other public
purposes for which municipal bonds may be issued include the refunding of
outstanding obligations, obtaining funds for general operating expenses and
obtaining funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds and other private
activity bonds are issued by or on behalf of public authorities to obtain funds
to provide for privately-operated housing facilities, and certain facilities for
water supply, gas, electricity or sewage or solid waste disposal.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities, or, in some cases, from the
proceeds of a special excise or specific revenue source. Industrial development
bonds which pay tax-exempt interest are in most cases revenue bonds and do not
generally carry the pledge of the full faith and credit of the issuer of such
bonds. The payment of the principal and interest on
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such industrial development bonds depends solely on the ability of the user of
the facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. Tax-Exempt Fund will not invest more than 5% of its net assets in
securities where the principal and interest are the responsibility of an
industrial user which has, including predecessors, less than three years'
operational history.
There are, depending on numerous factors, variations in the risks involved
in holding municipal securities, both within a particular rating classification
and between classifications. The market values of outstanding municipal bonds
will vary as a result of the rating of the issue and changing evaluations of the
ability of the issuer to meet interest and principal payments. Such market
values will also change in response to changes in the interest rates payable on
new issues of municipal bonds. Should such interest rates rise, the values of
outstanding bonds, including those held in Tax-Exempt Fund's portfolio, would
decline; should such interest rates decline, the values of outstanding bonds
would increase.
As a result of litigation or other factors, the power or ability of issuers
of municipal securities to pay principal and/or interest might be adversely
affected. Municipal securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest or both, or imposing other constraints upon enforcement of such
obligations or upon the power of municipalities to levy taxes.
Tax-Exempt Fund may invest without percentage limitations in issues of
municipal securities which have similar characteristics, such as the location of
their issuers in the same geographic region or the derivation of interest
payments from revenues on similar projects (for example, electric utility
systems, hospitals, or housing finance agencies). Thus, Tax-Exempt Fund may
invest more than 25% of its total assets in securities issued in a single state.
However, it may not invest more than 25% of its total assets in one industry.
(See "Investment Policy Limitations," page 25.) Consequently, the Fund's
portfolio of municipal securities may be more susceptible to the risks of
adverse economic, political, or regulatory developments than would be the case
with a portfolio of securities required to be more diversified as to geographic
region and/or source of revenue.
Interest on certain types of private activity bonds (for example,
obligations to finance certain exempt facilities which may be leased to or used
by persons other than the issuer) will not be exempt from federal income tax
when received by "substantial users" or persons related to "substantial users"
as defined in the Internal Revenue Code. The term "substantial user" generally
includes any "non-exempt person" who regularly uses in trade or business a part
of a facility financed from the proceeds of private activity bonds. Tax-Exempt
Fund may invest periodically in private activity bonds and, therefore, may not
be an appropriate investment for entities which are substantial users of
facilities financed by those bonds or "related persons" of substantial users.
Generally, an individual will not be a related person of a substantial user
under the Code unless the person or his immediate family (spouse, brothers,
sisters and lineal descendants) directly or indirectly owns in the aggregate
more than 50% in value of the equity of the substantial user.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on future issues of municipal securities. It can be expected that
similar proposals may be introduced in the future. If such a proposal were
enacted, the availability of municipal securities for investment by Tax-Exempt
Fund and the value of the Fund's portfolio would be affected. In that event, the
Directors would reevaluate the Fund's investment objective and policies.
WHEN-ISSUED PURCHASES. From time to time, in the ordinary course of
business, Tax-Exempt Fund may purchase municipal securities on a when-issued or
delayed delivery basis--i.e., delivery and payment can take place a month or
more after the date of the transactions. Securities so purchased are subject to
market fluctuation and no interest accrues to the purchaser during this period.
At the time the Fund makes the commitment to purchase a municipal security on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of the security in determining its net
asset value. Tax-Exempt Fund will also establish a segregated account with its
custodian bank in which it will maintain cash or liquid securities equal in
value to commitments for such when-issued or delayed delivery securities.
Tax-Exempt Fund does not believe that its net asset value or income will be
adversely affected by its purchase of municipal securities on a when-issued or
delayed delivery basis. Upon the settlement date of the when-issued securities,
the Fund ordinarily will meet its obligation to purchase the securities from
available cash flow, use of the cash (or liquidation of securities) held in the
segregated account or sale of other securities. Although it would not normally
expect to do so, the
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Fund also may meet its obligation from the sale of the when-issued securities
themselves (which may have a current market value greater or less than the
Fund's payment obligation). Sale of securities to meet such obligations carries
with it a greater potential for the realization of net capital gains, which are
not exempt from federal income tax.
PUTS OR STAND-BY COMMITMENTS. Tax-Exempt Fund may purchase, from banks or
broker/dealers, municipal securities together with the right to resell the
securities to the seller at an agreed-upon price or yield within a specified
period prior to the maturity date of the securities. Such a right to resell is
commonly known as a "put" and is also referred to as a "stand-by commitment" on
the part of the seller. The price which the Fund pays for the municipal
securities with puts generally is higher than the price which otherwise would be
paid for the municipal securities alone. Tax-Exempt Fund uses puts for liquidity
purposes in order to permit it to remain more fully invested in municipal
securities than would otherwise be the case by providing a ready market for
certain municipal securities in its portfolio at an acceptable price. The put
generally is for a shorter term than the maturity of the municipal security and
does not restrict in any way the Fund's ability to dispose of (or retain) the
municipal security.
In order to ensure that the interest on municipal securities subject to
puts is tax-exempt to the Fund, it will limit its use of puts in accordance with
current interpretations or rulings of the Internal Revenue Service (IRS). The
IRS has issued a ruling (Rev. Rul. 82-144) in which it determined that a
regulated investment company was the owner, for tax purposes, of municipal
securities subject to puts (with the result that interest on those securities
would not lose its tax-exempt status when paid to the company). The IRS position
in Rev. Rul. 82-144 relates to a particular factual situation, in which (i) the
price paid for the puts was in addition to the price of the municipal securities
subject to the puts, (ii) the puts established the price at which the seller
must repurchase the securities, (iii) the puts were nonassignable and terminated
upon disposal of the underlying securities by the Fund, (iv) the puts were for
periods substantially less than the terms of the underlying securities, (v) the
puts did not include call arrangements or restrict the disposal of the
underlying securities by the Fund and gave the seller no rights in the
underlying securities, and (vi) the securities were acquired by the Fund for its
own account and not as security for a loan from the seller.
Because it is difficult to evaluate the likelihood of exercise or the
potential benefit of a put, puts will be determined to have a "value" of zero,
regardless of whether any direct or indirect consideration was paid. Amounts
paid by Tax-Exempt Fund for a put will be reflected as unrealized depreciation
in the underlying security for the period during which the commitment is held,
and therefore will reduce any potential gains on the sale of the underlying
security by the cost of the put. There is a risk that the seller of the put may
not be able to repurchase the security upon exercise of the put by the Fund.
SHORT-TERM MUNICIPAL SECURITIES. Although Tax-Exempt Fund's portfolio
generally will consist primarily of municipal bonds, for liquidity purposes, and
from time to time for defensive purposes, a portion of its assets may be
invested in short-term municipal securities (i.e., those with less than one year
remaining to maturity).
Short-term municipal securities consist of short-term municipal notes and
short-term municipal loans and obligations, including municipal paper, master
demand notes and variable-rate demand notes. Short-term municipal notes include
tax anticipation notes (notes issued in anticipation of the receipt of tax
funds), bond anticipation notes (notes issued in anticipation of receipt of the
proceeds of bond placements), revenue anticipation notes (notes issued in
anticipation of the receipt of revenues other than taxes or bond placements),
and project notes (obligations of municipal housing agencies on which the
payment of principal and interest ordinarily is backed by the full faith and
credit of the U.S. government). Municipal paper typically consists of the very
short-term unsecured negotiable promissory notes of municipal issuers.
The Fund may invest in tax-exempt master demand notes. A municipal master
demand note is an arrangement under which the Fund participates in a note
agreement between a bank acting on behalf of its clients and a municipal
borrower, whereby amounts maintained by the Fund in an account with the bank are
provided to the municipal borrower and payments of interest and principal on the
note are credited to the Fund's account. Interest rates on master demand notes
typically are tied to market interest rates, and therefore may fluctuate daily.
The amounts borrowed under these notes may be repaid at any time by the borrower
without penalty, and must be repaid upon the demand of Tax-Exempt Fund.
Tax-Exempt Fund may also invest in variable-rate demand notes.
Variable-rate demand notes are tax-exempt obligations which are payable by the
municipal issuer at par value plus accrued interest on demand by the Fund
(generally with three to ten days' notice). If no demand is made, the note will
mature on a specified date from one
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to thirty years from its issuance. Payment on the note may be backed by a
stand-by letter of credit. The yield on a variable rate demand note is adjusted
automatically to reflect a particular market rate (which may not be the same
market rate as that applicable to a master demand note). Variable-rate demand
notes typically are callable by the issuer prior to maturity.
Where short-term municipal securities are rated, the Tax-Exempt Fund will
limit its investments to "high quality" short-term securities. For short-term
municipal notes this includes ratings of AA or better by S&P or MIG 2 or better
by Moody's; for municipal paper this includes A-2 or better by S&P or Prime-2 or
better by Moody's. Unrated short-term municipal securities will be included
within the Fund's overall limitation on investments in unrated municipal
securities. This limitation provides that not more than 20% of Tax-Exempt Fund's
total assets may be invested in unrated municipal securities, exclusive of
unrated securities which are guaranteed as to principal and interest by the full
faith and credit of the U.S. government or are issued by an issuer having
outstanding an issue of municipal bonds within one of the four highest ratings
classifications.
Tax-Exempt Fund also may engage to a limited extent in portfolio trading
consistent with its investment objective. Securities may be sold in anticipation
of a market decline (a rise in interest rates) or purchased in anticipation of a
market rise (a decline in interest rates) and later sold. In addition, a
security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what the Fund believes to be a
temporary disparity in the normal yield relationship between the two securities.
These yield disparities may occur for reasons not directly related to the
investment quality of a particular issue or the general movement of interest
rates, such as changes in the overall demand for, or supply of, various types of
municipal securities.
SECURITY CASH FUND
The investment objective of Cash Fund is to seek as high a level of current
income as is consistent with preservation of capital and liquidity. No
assurances can be given that Cash Fund will achieve its objective. The Fund will
attempt to achieve its objective by investing at least 95% of its total assets,
measured at the time of investment, in a diversified portfolio of highest
quality money market instruments. Cash Fund may also invest up to 5% of its
total assets, measured at the time of investment, in money market instruments
that are in the second-highest rating category for short-term debt obligations.
Money market instruments in which Cash Fund may invest consist of the following:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed (as to
principal or interest) by the United States Government or its agencies (such as
the Small Business Administration, the Federal Housing Administration and
Government National Mortgage Association) or instrumentalities (such as Federal
Home Loan Banks and Federal Land Banks) and instruments fully collateralized
with such obligations.
BANK OBLIGATIONS. Obligations of banks or savings and loan associations
that are members of the Federal Deposit Insurance Corporation and instruments
fully collateralized with such obligations.
CORPORATE OBLIGATIONS. Commercial paper issued by corporations and rated
Prime-1 or Prime-2 by Moody's, or A-1 or A-2 by S&P, or other corporate debt
instruments rated Aaa or Aa or better by Moody's or AAA or AA or better by S&P,
subject to the limitations on investment in instruments in the second-highest
rating category, discussed below.
Cash Fund may invest in certificates of deposit issued by banks or other
bank demand accounts, pending investment in other securities or to meet
potential redemptions or expenses.
Cash Fund may invest only in U.S. dollar denominated money market
instruments that present minimal credit risk and, with respect to 95% of its
total assets, measured at the time of investment, that are of the highest
quality. The Investment Manager will determine whether a security presents
minimal credit risk under procedures adopted by the Fund's Board of Directors. A
security will be considered to be highest quality (1) if rated in the highest
rating category, (e.g., Aaa or Prime-1 by Moody's or AAA or A-1 by S&P) by (i)
any two nationally recognized statistical rating organizations ("NRSRO's") or,
(ii) if rated by only one NRSRO, by that NRSRO; (2) if issued by an issuer that
has short-term debt obligations of comparable maturity, priority, and security
and that are rated in the highest rating category by (i) any two NRSRO's or,
(ii) if rated by only one NRSRO, by that NRSRO; or (3) an unrated security that
is of comparable quality to a security in the highest rating category as
determined by the Investment Manager and whose acquisition is approved or
ratified by the Board of Directors. With respect to 5% of its total assets,
measured at the time of investment, Cash Fund may also invest in money market
instruments that are in the second-highest rating category for short-term debt
obligations (e.g., rated Aa or Prime-2 by Moody's
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or AA or A-2 by S&P). A money market instrument will be considered to be in the
second-highest rating category under the criteria described above with respect
to instruments considered highest quality, as applied to instruments in the
second-highest rating category. See Appendix A to the Prospectus for a
description of the principal types of securities and instruments in which the
Fund will invest as well as a description of the above mentioned ratings.
Cash Fund may not invest more than 5% of its total assets, measured at the
time of investment, in the securities of any one issuer that are of the highest
quality or more than the greater of 1% of its total assets or $1,000,000,
measured at the time of investment, in securities of any one issuer that are in
the second-highest rating category, except that these limitations shall not
apply to U.S. Government securities. The Fund may exceed the 5% limitation for
up to three business days after the purchase of the securities of any one issuer
that are of the highest quality, provided that the Fund does not have
outstanding at any time more than one such investment. In the event that an
instrument acquired by Cash Fund is downgraded, the Investment Manager, under
procedures approved by the Board of Directors, (or the Board of Directors itself
if the Investment Manager becomes aware that a security has been downgraded
below the second-highest rating category and the Investment Manager does not
dispose of the security within five business days) shall promptly reassess
whether such security presents minimal credit risk and determine whether or not
to retain the instrument. In the event that an instrument acquired by Cash Fund
ceases to be of the quality that is eligible for the Fund, the Fund shall
promptly dispose of the instrument in an orderly manner unless the Board of
Directors determines that this would not be in the best interests of the Fund.
Cash Fund may acquire one or more of the above types of securities subject
to repurchase agreements. A repurchase transaction involves a purchase by the
Fund of a security from a selling financial institution, such as a bank, savings
and loan association or broker/dealer, which agrees to repurchase such security
at a specified price and at a fixed time in the future, usually not more than
seven days from the date of purchase. Not more than 10% of Cash Fund's total
assets will be invested in illiquid assets, which include repurchase agreements
with maturities of over seven days. See the discussion of repurchase agreements
under "Investment Methods and Risk Factors."
Cash Fund may borrow money from banks as a temporary measure for emergency
purposes or to facilitate redemption requests. Borrowing is discussed in more
detail under "Investment Methods and Risk Factors." Pending investment in
securities or to meet potential redemptions, the Fund may invest in certificates
of deposit, bank demand accounts and high quality money market instruments.
RULE 144A SECURITIES. Certain of the securities acquired by Cash Fund may
be restricted as to disposition under federal securities laws, provided that
such restricted securities are eligible for resale to qualified institutional
investors pursuant to Rule 144A under the Securities Act of 1933. Rule 144A was
adopted by the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Securities Act") in 1990. It provides a
nonexclusive safe harbor exemption from the registration requirements of the
Securities Act for the resale of certain securities to certain qualified buyers.
One of the primary purposes of the Rule is to create some resale liquidity for
certain securities that would otherwise be treated as illiquid investments. In
accordance with Cash Fund's policies, the Fund is not permitted to invest more
than 10% of its total net assets in illiquid securities. See the discussion of
Rule 144A Securities under "Investment Methods and Risk Factors."
VARIABLE RATE INSTRUMENTS. Cash Fund may invest in instruments having rates
of interest that are adjusted periodically according to a specified market rate
for such investments ("Variable Rate Instruments"). The interest rate on a
Variable Rate Instrument is ordinarily determined by reference to, or is a
percentage of, an objective standard such as a bank's prime rate or the 91-day
U.S. Treasury Bill rate. Cash Fund does not purchase certain Variable Rate
Instruments that have a preset cap above which the rate of interest may not
rise. Generally, the changes in the interest rate on Variable Rate Instruments
reduce the fluctuation in the market value of such securities. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less than for fixed-rate obligations. Cash Fund determines the
maturity of Variable Rate Instruments in accordance with Rule 2a-7 under the
Investment Company Act of 1940 which allows the Fund to consider the maturity
date of such instruments to be the period remaining until the next readjustment
of the interest rate rather than the maturity date on the face of the
instrument.
While Cash Fund does not intend to engage in short-term trading, portfolio
securities may be sold without regard to the length of time that they have been
held. A portfolio security could be sold prior to maturity to take advantage of
new investment opportunities or yield differentials, or to preserve gains or
limit losses due to changing economic conditions or the financial condition of
the issuer, or for other reasons. While Cash Fund is
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expected to have a high portfolio turnover due to the short maturities of its
portfolio securities, this should not affect the Fund's income or net asset
value since brokerage commissions are not normally paid in connection with the
purchase or sale of money market instruments.
Cash Fund will invest in money market instruments of varying maturities
(but no longer than 13 months) in an effort to earn as high a level of current
income as is consistent with preservation of capital and liquidity. The Fund
intends to maintain a weighted average maturity in its portfolio of not more
than 90 days. In addition to general market risks, Fund investments in
nongovernment obligations are subject to the ability of the issuer to satisfy
its obligations.
Cash Fund also intends to maintain a net asset value per share of $1.00,
although there can be no assurance it will be able to do so. It is the Fund's
policy to declare dividends on a daily basis of an amount equal to the net
income plus or minus any realized capital gains or losses. (See "Dividends and
Taxes," page 47.)
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Funds are described in the
"Investment Objectives and Policies" and "Investment Methods and Risk Factors"
sections of the Prospectus and in this Statement of Additional Information. The
following is a description of certain additional risk factors related to various
securities, instruments and techniques. The risks so described only apply to
those Funds which may invest in such securities and instruments or which use
such techniques. Also included is a general description of some of the
investment instruments, techniques and methods which may be used by one or more
of the Funds. The methods described only apply to those Funds which may use such
methods. Although a Fund may employ the techniques, instruments and methods
described below, consistent with its investment objective and policies and any
applicable law, no Fund will be required to do so.
GENERAL RISK FACTORS. Each Fund's net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions and, if
applicable, its net currency exposure. The value of fixed income securities held
by the Funds generally fluctuates inversely with interest rate movements. In
other words, bond prices generally fall as interest rates rise and generally
rise as interest rates fall. Longer term bonds held by the Funds are subject to
greater interest rate risk. There is no assurance that any Fund will achieve its
investment objective.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS.
Each of the Funds may enter into repurchase agreements. Repurchase agreements
are transactions in which the purchaser buys a debt security from a bank or
recognized securities dealer and simultaneously commits to resell that security
to the bank or dealer at an agreed upon price, date and market rate of interest
unrelated to the coupon rate or maturity of the purchased security. Repurchase
agreements are considered to be loans which must be fully collateralized
including interest earned thereon during the entire term of the agreement. If
the institution defaults on the repurchase agreement, the Fund will retain
possession of the underlying securities. If bankruptcy proceedings are commenced
with respect to the seller, realization on the collateral by the Fund may be
delayed or limited and the Fund may incur additional costs. In such case, the
Fund will be subject to risks associated with changes in market value of the
collateral securities. The Fund intends to enter into repurchase agreements only
with banks and broker/dealers believed to present minimal credit risks.
Accordingly, the Funds will enter into repurchase agreements only with (a)
brokers having total capitalization of at least $40 million and a ratio of
aggregate indebtedness to net capital of no more than 4 to 1, or, alternatively,
net capital equal to 6% of aggregate debit balances, or (b) banks having at
least $1 billion in assets and a net worth of at least $100 million as of its
most recent annual report. In addition, the aggregate repurchase price of all
repurchase agreements held by the Fund with any broker shall not exceed 15% of
the total assets of the Fund or $5 million, whichever is greater.
The High Yield Fund may also enter into reverse repurchase agreements with
the same parties with whom it may enter into repurchase agreements. Under a
reverse repurchase agreement, the Fund would sell securities and agree to
repurchase them at a particular price at a future date. Reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale by a Fund may decline below the price of the securities the Fund
has sold but is obligated to repurchase. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes insolvent,
such buyer or its trustee or receiver may receive an extension of time to
determine whether to enforce the Fund's obligation to repurchase the securities,
and the Fund's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision.
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The High Yield Fund also may enter into "dollar rolls," in which the Fund
sells fixed income securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund would forego principal and interest paid on such securities. The Fund would
be compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale.
BORROWING. Each of the Funds may borrow money from banks as a temporary
measure for emergency purposes, or to facilitate redemption requests.
From time to time, it may be advantageous for the Funds to borrow money
rather than sell existing portfolio positions to meet redemption requests.
Accordingly, the Funds may borrow from banks and High Yield Fund may borrow
through reverse repurchase agreements and "roll" transactions, in connection
with meeting requests for the redemption of Fund shares. High Yield Fund may
borrow up to 33 1/3%, Limited Maturity Bond, Tax-Exempt and Cash Funds may each
borrow up to 10% and Corporate Bond and U.S. Government Funds may each borrow up
to 5% of total Fund assets. To the extent that a Fund purchases securities while
it has outstanding borrowings, it is using leverage, i.e. using borrowed funds
for investment. Leveraging will exaggerate the effect on net asset value of any
increase or decrease in the market value of a Fund's portfolio. Money borrowed
for leveraging will be subject to interest costs that may or may not be
recovered by appreciation of the securities purchased; in certain cases,
interest costs may exceed the return received on the securities purchased. A
Fund also may be required to maintain minimum average balances in connection
with such borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing over
the stated interest rate. It is not expected that Cash Fund would purchase
securities while it had borrowings outstanding.
LENDING OF PORTFOLIO SECURITIES. For the purpose of generating income,
certain of the Funds may make secured loans of Fund securities amounting to not
more than 33 1/3% of its total assets. Securities loans are made to
broker/dealers, institutional investors, or other persons pursuant to agreements
requiring that the loans be continuously secured by collateral at least equal at
all times to the value of the securities lent marked to market on a daily basis.
The collateral received will consist of cash, U.S. Government securities,
letters of credit or such other collateral as may be permitted under its
investment program. While the securities are being lent, the Fund will continue
to receive the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. The Fund has a right to call each loan and obtain the
securities on five business days' notice or, in connection with securities
trading on foreign markets, within such longer period of time which coincides
with the normal settlement period for purchases and sales of such securities in
such foreign markets. The Fund will not have the right to vote securities while
they are being lent, but it will call a loan in anticipation of any important
vote. The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral or
in the recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to persons deemed
by the Investment Manager to be of good standing and will not be made unless, in
the judgment of the Investment Manager, the consideration to be earned from such
loans would justify the risk.
RESTRICTED SECURITIES (RULE 144A SECURITIES). Certain of the Funds may
invest in restricted securities which are securities that are restricted as to
disposition under the federal securities laws, provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933. Rule 144A permits the resale to "qualified
institutional buyers" of "restricted securities" that, when issued, were not of
the same class as securities listed on a U.S. securities exchange or quoted in
the National Association of Securities Dealers Automated Quotation System (the
"Rule 144A Securities"). A "qualified institutional buyer" is defined by Rule
144A generally as an institution, acting for its own account or for the accounts
of other qualified institutional buyers, that in the aggregate owns and invests
on a discretionary basis at least $100 million in securities of issuers not
affiliated with the institution. A dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), acting for its own account or the
accounts of other qualified institutional buyers, that in the aggregate owns and
invests on a discretionary basis at least $10 million in securities of issuers
not affiliated with the dealer may also qualify as a qualified institutional
buyer, as well as an Exchange Act registered dealer acting in a riskless
principal transaction on behalf of a qualified institutional buyer.
The Funds' Board of Directors is responsible for developing and
establishing guidelines and procedures for determining the liquidity of Rule
144A Securities. As permitted by Rule 144A, the Board of Directors has delegated
this responsibility to the Investment Manager. In making the determination
regarding the liquidity of
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Rule 144A Securities, the Investment Manager will consider trading markets for
the specific security taking into account the unregistered nature of a Rule 144A
security. In addition, the Investment Manager may consider: (1) the frequency of
trades and quotes; (2) the number of dealers and potential purchasers; (3)
dealer undertakings to make a market; and (4) the nature of the security and of
the market place trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). Investing in Rule
144A Securities could have the effect of increasing the amount of a Fund's
assets invested in illiquid securities to the extent that qualified
institutional buyers become uninterested, for a time, in purchasing these
securities.
The High Yield Fund also may purchase restricted securities that are not
eligible for resale pursuant to Rule 144A. The Fund may acquire such securities
through private placement transactions, directly from the issuer or from
security holders, generally at higher yields or on terms more favorable to
investors than comparable publicly traded securities. However, the restrictions
on resale of such securities may make it difficult for the Fund to dispose of
such securities at the time considered most advantageous, and/or may involve
expenses that would not be incurred in the sale of securities that were freely
marketable. Risks associated with restricted securities include the potential
obligation to pay all or part of the registration expenses in order to sell
certain restricted securities. A considerable period of time may elapse between
the time of the decision to sell a security and the time the Fund may be
permitted to sell it under an effective registration statement. If, during a
period, adverse conditions were to develop, the Fund might obtain a less
favorable price than prevailing when it decided to sell.
RISKS ASSOCIATED WITH LOWER-RATED DEBT SECURITIES (JUNK BONDS). Certain of
the Funds may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"). Debt rated BB, B, CCC, CC and C by S&P and rated Ba, B, Caa,
Ca and C by Moody's, is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation and C the highest degree of speculation. For Moody's, Ba
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Similarly, debt rated Ba or BB and below is
regarded by the relevant rating agency as speculative. Debt rated C by Moody's
or S&P is the lowest quality debt that is not in default as to principal or
interest and such issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Such securities are
also generally considered to be subject to greater risk than higher quality
securities with regard to a deterioration of general economic conditions.
Ratings of debt securities represent the rating agency's opinion regarding their
quality and are not a guarantee of quality. Rating agencies attempt to evaluate
the safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value. Also, rating agencies may fail to make timely
changes in credit quality in response to subsequent events, so that an issuer's
current financial condition may be better or worse than a rating indicates.
The market value of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower quality securities may
experience financial stress. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. Similarly, certain emerging market governments that issue lower
quality debt securities are among the largest debtors to commercial banks,
foreign governments and supranational organizations such as the World Bank and
may not be able or willing to make principal and/or interest repayments as they
come due. The risk of loss due to default by the issuer is significantly greater
for the holders of lower quality securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Lower quality debt securities of corporate issuers frequently have call or
buy-back features which would permit an issuer to call or repurchase the
security from the Fund. If an issuer exercises these provisions in a declining
interest rate market, the Fund may have to replace the security with a lower
yielding security, resulting in a
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decreased return for investors. In addition, the Fund may have difficulty
disposing of lower quality securities because there may be a thin trading market
for such securities. There may be no established retail secondary market for
many of these securities, and the Fund anticipates that such securities could be
sold only to a limited number of dealers or institutional investors. The lack of
a liquid secondary market also may have an adverse impact on market prices of
such instruments and may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the securities in the portfolio of the
Fund.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
quality securities, especially in a thinly traded market. The High Yield Fund
also may acquire lower quality debt securities during an initial underwriting or
may acquire lower quality debt securities which are sold without registration
under applicable securities laws. Such securities involve special considerations
and risks.
Factors having an adverse effect on the market value of lower rated
securities or their equivalents purchased by the Fund will adversely impact net
asset value of the Fund. See "Risk Factors" in the Prospectus. In addition to
the foregoing, such factors may include: (i) potential adverse publicity; (ii)
heightened sensitivity to general economic or political conditions; and (iii)
the likely adverse impact of a major economic recession. The Fund also may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings, and the Fund
may have limited legal recourse in the event of a default. Debt securities
issued by governments in emerging markets can differ from debt obligations
issued by private entities in that remedies from defaults generally must be
pursued in the courts of the defaulting government, and legal recourse is
therefore somewhat diminished. Political conditions, in terms of a government's
willingness to meet the terms of its debt obligations, also are of considerable
significance. There can be no assurance that the holders of commercial bank debt
may not contest payments to the holders of debt securities issued by governments
in emerging markets in the event of default by the governments under commercial
bank loan agreements.
The Investment Manager will attempt to minimize the speculative risks
associated with investments in lower quality securities through credit analyses
and by carefully monitoring current trends in interest rates, political
developments and other factors. Nonetheless, investors should carefully review
the investment objectives and policies of the Funds and consider their ability
to assume the investment risks involved before making an investment in the
Funds.
CONVERTIBLE SECURITIES AND WARRANTS. Certain of the Funds may invest in
debt or preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than nonconvertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during the
life of the warrants (generally two or more years).
MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS. Certain
of the Funds may invest in mortgage-backed securities (MBSs), including mortgage
pass-through securities and collateralized mortgage obligations (CMOs). MBSs
include certain securities issued or guaranteed by the United States Government
or one of its agencies or instrumentalities, such as the Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), or
Federal Home Loan Mortgage Corporation (FHLMC); securities issued by private
issuers that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and securities issued by private issuers that represent an
interest in or are collateralized by mortgage loans. A mortgage pass-through
security is a pro rata interest in a pool of mortgages where the cash flow
generated from the mortgage collateral is passed through to the security holder.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. Certain of the Funds may invest in securities known
as "inverse floating obligations," "residual interest bonds," or "interest-only"
(IO) and "principal-only" (PO) bonds, the market values of which will generally
be more volatile than the market values of most MBSs. An inverse floating
obligation is a derivative adjustable rate security with interest rates that
adjust or vary inversely to changes in market interest rates. The term "residual
interest" bond is used generally to describe those instruments in collateral
pools, such as CMOs, which receive any excess cash flow generated by the pool
once all other bondholders and expenses have been paid. IOs and POs are created
by separating the interest and principal payments generated by a pool of
mortgage-backed bonds
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to create two classes of securities. Generally, one class receives interest only
payments (IOs) and the other class principal only payments (POs). MBSs have been
referred to as "derivatives" because the performance of MBSs is dependent upon
and derived from underlying securities.
CMOs may be issued in a variety of classes and the Funds may invest in
several CMO classes, including, but not limited to Floaters, Planned
Amortization Classes (PACs), Scheduled Classes (SCHs), Sequential Pay Classes
(SEQs), Support Classes (SUPs), Target Amortization Classes (TACs) and Accrual
Classes (Z Classes). CMO classes vary in the rate and time at which they receive
principal and interest payments. SEQs, also called plain vanilla, clean pay, or
current pay classes, sequentially receive principal payments from underlying
mortgage securities when the principal on a previous class has been completely
paid off. During the months prior to their receipt of principal payments, SEQs
receive interest payments at the coupon rate on their principal. PACs are
designed to produce a stable cash flow of principal payments over a
predetermined period of time. PACs guard against a certain level of prepayment
risk by distributing prepayments to SUPs, also called companion classes. TACs
pay a targeted principal payment schedule, as long as prepayments are not made
at a rate slower than an expected constant prepayment speed. If prepayments
increase, the excess over the target is paid to SUPs. SEQs may have a less
stable cash flow than PACs and TACs and, consequently, have a greater potential
yield. PACs generally pay a lower yield than TACs because of PACs' lower risk.
Because SUPs are directly affected by the rate of prepayment of underlying
mortgages, SUPs may experience volatile cash flow behavior. When prepayment
speeds fluctuate, the average life of a SUP will vary. SUPs, therefore, are
priced at a higher yield than less volatile classes of CMOs. Z Classes do not
receive payments, including interest payments, until certain other classes are
paid off. At that time, the Z Class begins to receive the accumulated interest
and principal payments. A Floater has a coupon rate that adjusts periodically
(usually monthly) by adding a spread to a benchmark index subject to a lifetime
maximum cap. The yield of a Floater is sensitive to prepayment rates and the
level of the benchmark index.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. Prepayment risk reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's average
life and perhaps its yield. Borrowers are most likely to exercise their
prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others with
respect to the receipt of prepayments on the mortgages and the Fund may invest
in CMOs which are subject to greater risk of prepayment as discussed above.
Market risk reflects the chance that the price of the security may fluctuate
over time. The price of MBSs may be particularly sensitive to prevailing
interest rates, the length of time the security is expected to be outstanding
and the liquidity of the issue. In a period of unstable interest rates, there
may be decreased demand for certain types of MBSs, and a Fund invested in such
securities wishing to sell them may find it difficult to find a buyer, which may
in turn decrease the price at which they may be sold. Credit risk reflects the
chance that the Fund may not receive all or part of its principal because the
issuer or credit enhancer has defaulted on its obligations. Obligations issued
by U.S. Government-related entities are guaranteed by the agency or
instrumentality, and some, such as GNMA certificates, are supported by the full
faith and credit of the U.S. Treasury; others are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the FNMA, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, are supported only by the credit of the
instrumentality. Although securities issued by U.S. Government-related agencies
are guaranteed by the U.S. Government, its agencies or instrumentalities, shares
of the Fund are not so guaranteed in any way. The performance of private label
MBSs, issued by private institutions, is based on the financial health of those
institutions.
ASSET-BACKED SECURITIES. Certain of the Funds may also invest in
"asset-backed securities." These include secured debt instruments backed by
automobile loans, credit card loans, home equity loans, manufactured housing
loans and other types of secured loans providing the source of both principal
and interest. Asset-backed securities are subject to risks similar to those
discussed above with respect to MBSs.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. Certain of the Funds may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. The price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Funds will enter
into when-issued and forward commitments only with the intention of actually
receiving or delivering the
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securities, as the case may be. No income accrues on securities which have been
purchased pursuant to a forward commitment or on a when-issued basis prior to
delivery of the securities. If a Fund disposes of the right to acquire a
when-issued security prior to its acquisition or disposes of its right to
deliver or receive against a forward commitment, it may incur a gain or loss. At
the time a Fund enters into a transaction on a when-issued or forward commitment
basis, a segregated account consisting of cash or liquid securities equal to the
value of the when-issued or forward commitment securities will be established
and maintained with its custodian and will be marked to market daily. There is a
risk that the securities may not be delivered and that the Fund may incur a
loss.
DERIVATIVE INSTRUMENTS: OPTIONS AND FUTURES STRATEGIES
WRITING COVERED CALL OPTIONS. Certain of the Funds may write (sell) covered
call options. Covered call options generally will be written on securities and
currencies which, in the opinion of the Investment Manager are not expected to
make any major price moves in the near future but which, over the long term, are
deemed to be attractive investments.
A call option gives the holder (buyer) the right to purchase a security or
currency at a specified price (the exercise price) at any time until a certain
date (the expiration date). So long as the obligation of the writer of a call
option continues, he may be assigned an exercise notice by the broker/dealer
through whom such option was sold, requiring him to deliver the underlying
security or currency against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at which
the writer effects a closing purchase transaction by purchasing an option
identical to that previously sold. The Investment Manager believes that writing
covered call options is less risky than writing uncovered or "naked" options,
which the Funds will not do.
Portfolio securities on which call options may be written will be purchased
solely on the basis of investment considerations consistent with that Fund's
investment objectives. When writing a covered call option, the Fund in return
for the premium gives up the opportunity for profit from a price increase in the
underlying security above the exercise price, and retains the risk of loss
should the price of the security decline. Unlike one who owns securities not
subject to an option, a Fund has no control over when it may be required to sell
the underlying securities, since the option may be exercised at any time prior
to the option's expiration. If a call option which a Fund has written expires,
the Fund will realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying security during
the option period. If the call option is exercised, a Fund will realize a gain
or loss from the sale of the underlying security.
The premium which a Fund receives for writing a call option is deemed to
constitute the market value of an option. The premium the Fund will receive from
writing a call option will reflect, among other things, the current market price
of the underlying security, the relationship of the exercise price to such
market price, the historical price volatility of the underlying security, and
the length of the option period. In determining whether a particular call option
should be written on a particular security, the Investment Manager will consider
the reasonableness of the anticipated premium and the likelihood that a liquid
secondary market will exist for those options. The premium received by a Fund
for writing covered call options will be recorded as a liability in the Fund's
statement of assets and liabilities. This liability will be adjusted daily to
the option's current market value, which will be the latest sales price at the
time which the net asset value per share of the Fund is computed at the close of
regular trading on the NYSE (currently, 3:00 p.m. Central time, unless weather,
equipment failure or other factors contribute to an earlier closing time), or,
in the absence of such sale, the latest asked price. The liability will be
extinguished upon expiration of the option, the purchase of an identical option
in a closing transaction, or delivery of the underlying security upon the
exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security from being called, or
to permit the sale of the underlying security. Furthermore, effecting a closing
transaction will permit a Fund to write another call option on the underlying
security with either a different exercise price, expiration date or both. If the
Fund desires to sell a particular security from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security.
There is no assurance that the Fund will be able to effect such closing
transactions at favorable prices. If the Fund cannot enter into such a
transaction, it may be required to hold a security that it might otherwise have
sold, in which case it would continue to be at market risk with respect to the
security.
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The Fund will pay transaction costs in connection with the writing of
options and in entering into closing purchase contracts. Transaction costs
relating to options activity normally are higher than those applicable to
purchases and sales of portfolio securities.
Call options written by the Fund normally will have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to or above the current market values of the underlying
securities at the time the options are written. From time to time, the Fund may
purchase an underlying security for delivery in accordance with the exercise of
an option, rather than delivering such security from its portfolio. In such
cases, additional costs will be incurred.
The Fund will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more, respectively, than the premium
received from the writing of the option. Because increases in the market price
of a call option generally will reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Fund.
WRITING COVERED PUT OPTIONS. Certain of the Funds may write covered put
options. A put option gives the purchaser of the option the right to sell, and
the writer (seller) the obligation to buy, the underlying security at the
exercise price during the option period. The option may be exercised at any time
prior to its expiration date. The operation of put options in other respects,
including their related risks and rewards, is substantially identical to that of
call options.
The Fund would write put options only on a covered basis, which means that
the Fund would either (i) set aside cash or liquid securities in an amount not
less than the exercise price at all times while the put option is outstanding
(the rules of the Options Clearing Corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price), (ii)
sell short the security underlying the put option at the same or higher price
than the exercise price of the put option, or (iii) purchase a put option, if
the exercise price of the purchased put option is the same or higher than the
exercise price of the put option sold by the Fund. The Fund generally would
write covered put options in circumstances where the Investment Manager wishes
to purchase the underlying security for the Fund's portfolio at a price lower
than the current market price of the security. In such event, the Fund would
write a put option at an exercise price which, reduced by the premium received
on the option, reflects the lower price it is willing to pay. Since the Fund
also would receive interest on debt securities maintained to cover the exercise
price of the option, this technique could be used to enhance current return
during periods of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security would decline below the
exercise price less the premiums received.
PURCHASING PUT OPTIONS. Certain of the Funds may purchase put options. As
the holder of a put option, the Fund would have the right to sell the underlying
security at the exercise price at any time during the option period. The Fund
may enter into closing sale transactions with respect to such options, exercise
them or permit them to expire.
The Fund may purchase a put option on an underlying security ("protective
put") owned by the Fund as a hedging technique in order to protect against an
anticipated decline in the value of the security. Such hedge protection is
provided only during the life of the put option when the Fund, as the holder of
the put option, is able to sell the underlying security at the put exercise
price regardless of any decline in the underlying security's market price. For
example, a put option may be purchased in order to protect unrealized
appreciation of a security when the Investment Manager deems it desirable to
continue to hold the security because of tax considerations. The premium paid
for the put option and any transaction costs would reduce any capital gain
otherwise available for distribution when the security eventually is sold.
Certain Funds also may purchase put options at a time when the Fund does
not own the underlying security. By purchasing put options on a security it does
not own, the Fund seeks to benefit from a decline in the market price of the
underlying security. If the put option is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price during the life of the put option, the Fund will lose
its entire investment in the put option. In order for the purchase of a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction cost, unless the put option is sold in a closing sale transaction.
The premium paid by the Fund when purchasing a put option will be recorded
as an asset in the Fund's statement of assets and liabilities. This asset will
be adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (at the close of regular
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trading on the NYSE), or, in the absence of such sale, the latest bid price. The
asset will be extinguished upon expiration of the option, the writing of an
identical option in a closing transaction, or the delivery of the underlying
security upon the exercise of the option.
PURCHASING CALL OPTIONS. Certain Funds may purchase call options. As the
holder of a call option, the Fund would have the right to purchase the
underlying security at the exercise price at any time during the option period.
The Fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. Call options may be purchased by the
Fund for the purpose of acquiring the underlying security for its portfolio.
Utilized in this fashion, the purchase of call options would enable the Fund to
acquire the security at the exercise price of the call option plus the premium
paid. At times, the net cost of acquiring the security in this manner may be
less than the cost of acquiring the security directly. This technique also may
be useful to a Fund in purchasing a large block of securities that would be more
difficult to acquire by direct market purchases. So long as it holds such a call
option rather than the underlying security itself, the Fund is partially
protected from any unexpected decline in the market price of the underlying
security and in such event could allow the call option to expire, incurring a
loss only to the extent of the premium paid for the option.
The Fund also may purchase call options on underlying securities it owns in
order to protect unrealized gains on call options previously written by it. A
call option would be purchased for this purpose where tax considerations make it
inadvisable to realize such gains through a closing purchase transaction. Call
options also may be purchased at times to avoid realizing losses that would
result in a reduction of the Fund's current return. For example, the Fund has
written a call option on an underlying security having a current market value
below the price at which such security was purchased by the Fund, an increase in
the market price could result in the exercise of the call option written by the
Fund and the realization of a loss on the underlying security with the same
exercise price and expiration date as the option previously written.
Aggregate premiums paid for put and call options will not exceed 5% of the
Fund's total assets at the time of purchase.
INTEREST RATE FUTURES CONTRACTS. Certain Funds may enter into interest rate
futures contracts ("Futures" or "Futures Contracts") as a hedge against changes
in prevailing levels of interest rates. A Fund's hedging may include sales of
Futures as an offset against the effect of expected increases in interest rates,
and purchases of Futures as an offset against the effect of expected declines in
interest rates.
The Funds will not enter into Futures Contracts for speculation and will
only enter into Futures Contracts which are traded on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal interest rate exchanges in the United States are the Board of
Trade of the City of Chicago and the Chicago Mercantile Exchange. Futures
exchanges and trading are regulated under the Commodity Exchange Act by the
Commodity Futures Trading Commission ("CFTC"). Futures are exchanged in London
at the London International Financial Futures Exchange.
Although techniques other than sales and purchases of Futures Contracts
could be used to reduce a Fund's exposure to interest rate fluctuations, the
Fund may be able to hedge exposure more effectively and at a lower cost through
using Futures Contracts.
The Fund will not enter into a Futures Contract if, as a result thereof,
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to "margin" (down payment)
deposits on such Futures Contracts.
A Futures Contract provides for the future sale by one party and purchase
by another party of a specified amount of a specific financial instrument (debt
security) for a specified price at a designated date, time and place. Brokerage
fees are incurred when a Futures Contract is bought or sold, and margin deposits
must be maintained at all times the Futures Contract is outstanding.
Although Futures Contracts typically require future delivery of and payment
for financial instruments, Futures Contracts usually are closed out before the
delivery date. Closing out an open Futures Contract sale or purchase is effected
by entering into an offsetting Futures Contract purchase or sale, respectively,
for the same aggregate amount of the identical financial instrument and the same
delivery date. If the offsetting purchase price is less than the original sale
price, the Fund realizes a gain; if it is more, the Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs also must be included in these calculations. There can be no
assurance, however, that the Fund will be able to enter into an offsetting
transaction with respect to a particular Futures
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Contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the Futures Contract.
Persons who trade in Futures Contracts may be broadly classified as
"hedgers" and "speculators." Hedgers, such as the Funds, whose business activity
involves investment or other commitment in securities or other obligations, use
the Futures markets primarily to offset unfavorable changes in value that may
occur because of fluctuations in the value of the securities and obligations
held or expected to be acquired by them. Debtors and other obligors also may
hedge the interest cost of their obligations. The speculator, like the hedger,
generally expects neither to deliver nor to receive the financial instrument
underlying the Futures Contract, but, unlike the hedger, hopes to profit from
fluctuations in prevailing interest rates.
The Fund's Futures transactions will be entered into for traditional
hedging purposes; that is, Futures Contracts will be sold to protect against a
decline in the price of securities that the Fund owns, or Futures Contracts will
be purchased to protect the Fund against an increase in the price of securities
it has committed to purchase or expects to purchase.
"Margin" with respect to Futures Contracts is the amount of funds that must
be deposited by the Fund, in a segregated account with the Fund's custodian, in
order to initiate Futures trading and to maintain the Fund's open positions in
Futures Contracts. A margin deposit made when the Futures Contract is entered
into ("initial margin") is intended to assure the Fund's performance of the
Futures Contract. The margin required for a particular Futures Contract is set
by the exchange on which the Futures Contract is traded, and may be modified
significantly from time to time by the exchange during the term of the Futures
Contract. Futures Contracts customarily are purchased and sold on margins that
may range upward from less than 5% of the value of the Futures Contract being
traded.
If the price of an open Futures Contract changes (by increase in the case
of a sale or by decrease in the case of a purchase) so that the loss on the
Futures Contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin deposit
("margin variation"). If the value of a position increases because of favorable
price changes in the Futures Contract so that the margin deposit exceeds the
required margin, however, the broker will pay the excess to the Fund. In
computing daily net asset values, the Fund will mark to market the current value
of its open Futures Contracts. The Fund expects to earn interest income on its
margin deposits.
RISKS OF USING FUTURES CONTRACTS. The prices of Futures Contracts are
volatile and are influenced, among other things, by actual and anticipated
changes in interest rates, which in turn are affected by fiscal and monetary
policies and national and international political and economic events.
There is a risk of imperfect correlation between changes in prices of
Futures Contracts and prices of the securities in the Fund's portfolio being
hedged. The degree of imperfection of correlation depends upon circumstances
such as: variations in speculative market demand for Futures and for debt
securities, including technical influences in Futures trading; and differences
between the financial instruments being hedged and the instruments underlying
the standard Futures Contracts available for trading, with respect to interest
rate levels, maturities, and creditworthiness of issuers. A decision of whether,
when, and how to hedge involves skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of unexpected market behavior
or interest rate trends.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the Futures Contract is deposited as margin, a subsequent 10%
decrease in the value of the Futures Contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss of 150% of
the original margin deposit, if the Contract were closed out. Thus, a purchase
or sale of a Futures Contract may result in losses in excess of the amount
invested in the Futures Contract. However, the Fund presumably would have
sustained comparable losses if, instead of the Futures Contract, it had invested
in the underlying financial instrument and sold it after the decline.
Furthermore, in the case of a Futures Contract purchase, in order to be
certain that the Fund has sufficient assets to satisfy its obligations under a
Futures Contract, the Fund sets aside and commits to back the Futures Contract
an amount of cash and liquid securities equal in value to the current value of
the underlying instrument less margin deposit.
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In the case of a Futures contract sale, the Fund either will set aside
amounts, as in the case of a Futures Contract purchase, own the security
underlying the contract or hold a call option permitting the Fund to purchase
the same Futures Contract at a price no higher than the contract price. Assets
used as cover cannot be sold while the position in the corresponding Futures
Contract is open, unless they are replaced with similar assets. As a result, the
commitment of a significant portion of the Fund's assets to cover could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Most U.S. Futures exchanges limit the amount of fluctuation permitted in
Futures Contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a Futures Contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of Futures Contract,
no trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures Contract prices occasionally have moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of Futures positions and subjecting some
Futures traders to substantial losses.
OPTIONS ON FUTURES CONTRACTS. Options on Futures Contracts are similar to
options on securities except that options on Futures Contracts give the
purchaser the right, in return for the premium paid, to assume a position in a
Futures Contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell the Futures Contract,
at a specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the Futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's Futures margin account which represents the
amount by which the market price of the Futures Contract, at exercise, exceeds
(in the case of a call) or is less than (in the case of a put) the exercise
price of the option on the Futures Contract. If an option is exercised on the
last trading day prior to the expiration date of the option, the settlement will
be made entirely in cash equal to the difference between the exercise price of
the option and the closing level of the securities or index upon which the
Futures Contracts are based on the expiration date. Purchasers of options who
fail to exercise their options prior to the exercise date suffer a loss of the
premium paid.
As an alternative to purchasing call and put options on Futures, the Fund
may purchase call and put options on the underlying securities themselves. Such
options would be used in a manner identical to the use of options on Futures
Contracts.
To reduce or eliminate the leverage then employed by the Fund, or to reduce
or eliminate the hedge position then currently held by the Fund, the Fund may
seek to close out an option position by selling an option covering the same
securities or contract and having the same exercise price and expiration date.
Trading in options on Futures Contracts began relatively recently. The ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
this market will develop.
INTEREST RATE AND CURRENCY SWAPS. The High Yield Fund may enter into
interest rate and index swaps and the purchase or sale of related caps, floors
and collars. The Fund usually will enter into interest rate swaps on a net basis
if the contract so provides, that is, the two payment streams are netted out in
a cash settlement on the payment date or dates specified in the instrument, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as swaps, caps, floors and collars are entered into for good
faith hedging purposes, the Fund and the Investment Manager, believe that they
do not constitute senior securities under the 1940 Act if appropriately covered
and, thus, will not treat them as being subject to the Fund's borrowing
restrictions. The Fund will not enter into any swap, cap, floor, collar or other
derivative transaction unless, at the time of entering into the transaction, the
unsecured long-term debt rating of the counterparty combined with any credit
enhancements is rated at least A by Moody's or S&P or has an equivalent rating
from a nationally recognized statistical rating organization or is determined to
be of equivalent credit quality by the Investment Manager. If a counterparty
defaults, the Fund may have contractual remedies pursuant to the agreements
related to the transactions. The swap market has grown substantially in recent
years, with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps.
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EMERGING COUNTRIES. Certain of the Funds may invest in debt securities in
emerging markets. Investing in securities in emerging countries may entail
greater risks than investing in debt securities in developed countries. These
risks include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; and
(v) the absence of developed structures governing private or foreign investment
or allowing for judicial redress for injury to private property.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Funds. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investments by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. In addition, some countries
require governmental approval for the repatriation of investment income, capital
or the proceeds of securities sales by foreign investors. A Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation, as well as by the application to it of
other restrictions on investments.
POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S. companies
may entail additional risks due to the potential political and economic
instability of certain countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country, a Fund
could lose its entire investment in any such country.
An investment in a Fund which invests in non-U.S. companies is subject to
the political and economic risks associated with investments in foreign markets.
Even though opportunities for investment may exist in emerging markets, any
change in the leadership or policies of the governments of those countries or in
the leadership or policies of any other government which exercises a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and thereby
eliminate any investment opportunities which may currently exist.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging market countries previously
expropriated large quantities of real and personal property similar to the
property which will be represented by the securities purchased by a Fund. The
claims of property owners against those governments were never finally settled.
There can be no assurance that any property represented by securities purchased
by a Fund will not also be expropriated, nationalized, or otherwise confiscated.
If such confiscation were to occur, the Fund could lose a substantial portion of
its investments in such countries. The Fund's investments would similarly be
adversely affected by exchange control regulation in any of those countries.
RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which a Fund may
invest may have vocal minorities that advocate radical religious or
revolutionary philosophies or support ethnic independence. Any disturbance on
the part of such individuals could carry the potential for wide-spread
destruction or confiscation of property owned by individuals and entities
foreign to such country and could cause the loss of the Fund's investment in
those countries.
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION.
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most of the foreign securities held by a Fund will not be
registered with the SEC or regulators of any foreign country, nor will the
issuers thereof be subject to the SEC's reporting requirements. Thus, there will
be less available information concerning foreign issuers of securities held by
the Fund than is available concerning U.S. issuers. In instances where the
financial statements of an issuer are not deemed to reflect accurately the
financial situation of the issuer, the Investment Manager and relevant
Sub-Adviser will take appropriate steps to evaluate the proposed investment,
which may include on-site inspection of the issuer, interviews with its
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management and consultations with accountants, bankers and other specialists.
There is substantially less publicly available information about foreign
companies than there are reports and ratings published about U.S. companies and
the U.S. Government. In addition, where public information is available, it may
be less reliable than such information regarding U.S. issuers.
ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be
less liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers generally are
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions usually are subject to fixed
commissions, which generally are higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause it to
miss attractive opportunities. Inability to dispose of a portfolio security due
to settlement problems either could result in losses to the Fund due to
subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser. The Investment Manager will consider such difficulties when
determining the allocation of the Fund's assets.
NON-U.S. WITHHOLDING TAXES. A Fund's investment income and gains from
foreign issuers may be subject to non-U.S. withholding and other taxes, thereby
reducing the Fund's investment income and gains.
COSTS. Investors should understand that the expense ratio of the Funds that
invest in foreign securities can be expected to be higher than investment
companies investing in domestic securities since the cost of maintaining the
custody of foreign securities and the rate of advisory fees paid by the Funds
are higher.
EASTERN EUROPE. Changes occurring in Eastern Europe and Russia today could
have long-term potential consequences. As restrictions fail, this could result
in rising standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment in the countries
of Eastern Europe and Russia is highly speculative at this time. Political and
economic reforms are too recent to establish a definite trend away from
centrally-planned economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or formal market for
securities. Such countries may also have government exchange controls,
currencies with no recognizable market value relative to the established
currencies of western market economies, little or no experience in trading in
securities, no financial reporting standards, a lack of a banking and securities
infrastructure to handle such trading, and a legal tradition which does not
recognize rights in private property. In addition, these countries may have
national policies which restrict investments in companies deemed sensitive to
the country's national interest. Further, the governments in such countries may
require governmental or quasi-governmental authorities to act as custodian of
the Fund's assets invested in such countries and these authorities may not
qualify as a foreign custodian under the Investment Company Act of 1940 and
exemptive relief from such Act may be required. All of these considerations are
among the factors which could cause significant risks and uncertainties to
investment in Eastern Europe and Russia.
AMERICAN DEPOSITARY RECEIPTS (ADRS). The High Yield Fund may invest in
ADRs. ADRs are dollar-denominated receipts issued generally by U.S. banks and
which represent the deposit with the bank of a foreign company's securities.
ADRs are publicly traded on exchanges or over-the-counter in the United States.
Investors should consider carefully the substantial risks involved in investing
in securities issued by companies of foreign nations, which are in addition to
the usual risks inherent in domestic investments. See "Foreign Investment
Restrictions," above.
INVESTMENT POLICY LIMITATIONS
Each of the Funds operate within certain fundamental investment policy
limitations. These limitations may not be changed for the Funds without approval
of the lesser of (i) 67% or more of the voting securities present at a meeting
if the holders of more than 50% of the outstanding voting securities of that
Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of that Fund.
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INCOME FUND'S FUNDAMENTAL POLICIES
The fundamental investment policies of the Income Fund, which are
applicable to each of the Corporate Bond, Limited Maturity Bond, U.S. Government
and High Yield Funds are:
1. Not to invest in companies having a record of less than three years'
continuous operation, which may include the operations of predecessor
companies; provided, however, that this investment policy does not apply
to the High Yield Fund.
2. Not to invest in the securities of an issuer if the officers and directors
of the Fund, Underwriter or Manager own more than 1/2 of 1% of such
securities or if all such persons together own more than 5% of such
securities.
3. Not to invest more than 5% of its assets in the securities of any one
issuer (other than securities of the U.S. Government, its agencies or
instrumentalities); provided, however, that for the High Yield Fund, this
limitation applies only with respect to 75% of the value of its total
assets.
4. Not to purchase more than 10% of the outstanding voting securities (or of
any class of outstanding securities) of any one issuer (other than
securities of the U.S. Government, its agencies or instrumentalities).
5. Not to invest in companies for the purpose of exercising control of
management.
6. Not to act as underwriter of securities of other issuers.
7. Not to invest in an amount equal to, or in excess of, 25% of its total
assets in any particular industry (other than securities of the U.S.
Government, its agencies or instrumentalities).
8. Not to purchase or sell real estate. (This policy shall not prevent the
Fund from investing in securities or other instruments backed by real
estate or in securities of companies engaged in the real estate business.)
9. Not to buy or sell commodities or commodity contracts; provided, however,
that the Funds may, to the extent appropriate under their investment
programs, purchase securities of companies engaged in such activities, may
enter into transactions in financial futures contracts and related options
for hedging purposes, may engage in transactions on a when-issued or
forward commitment basis and may enter into forward currency contracts.
10. Not to make loans to other persons other than for the purchase of publicly
distributed debt securities and U.S. Government obligations or by entry
into repurchase agreements; provided, however, that this investment
limitation does not apply to the High Yield Fund.
11. Not to invest its assets in puts, calls, straddles, spreads, or any
combination thereof; provided, however, that this investment policy does
not apply to High Yield Fund.
12. Not to invest in limited partnerships or similar interests in oil, gas,
mineral lease, mineral exploration or development programs; provided,
however, that the Fund may invest in the securities of other corporations
whose activities include such exploration and development.
13. With respect to each of the Corporate Bond and U.S. Government Funds, not
to borrow money except for emergency purposes, and then not in excess of
5% of its total assets at the time the loan is made. (Any such borrowings
will be made on a temporary basis from banks and will not be made for
investment purposes.) With respect to the Limited Maturity Bond Fund, not
to borrow money in excess of 10% of its total assets at the time the loan
is made, and then only as a temporary measure for emergency purposes, to
facilitate redemption requests, or for other purposes consistent with the
Fund's investment objectives and policies. With respect to High Yield
Fund, not to borrow money, except that (a) the Fund may enter into certain
futures contracts and options related thereto; (b) the Fund may enter into
commitments to purchase securities in accordance with the Fund's
investment program, including delayed delivery and when-issued securities
and reverse repurchase agreements, and (c) for temporary emergency
purposes, High Yield Fund may borrow in amounts not exceeding 33 1/3% of
the value of its total assets at the time when the loan is made.
14. Not to purchase securities of any other investment company; provided,
however that Limited Maturity Bond Fund and the High Yield Fund may
purchase securities of any investment company if in compliance with the
Investment Company Act of 1940.
15. With respect to each of the Corporate Bond and U.S. Government Funds, not
to issue senior securities; provided, however, that Limited Maturity Bond
Fund and the High Yield Fund may issue senior securities if in compliance
with the Investment Company Act of 1940.
16. With respect to Corporate Bond and U.S. Government Funds, not to invest in
restricted securities (restricted securities are securities for which an
active and substantial market does not exist at the time of purchase or
26
<PAGE>
upon subsequent valuation, or for which there are legal or contractual
restrictions as to disposition); provided, however that Limited Maturity
Bond Fund may invest in restricted securities if those securities are
eligible for resale to qualified institutional investors pursuant to Rule
144A under the Securities Act of 1933; and High Yield Fund may not invest
more than 15% of its total assets in illiquid securities.
With respect to Fundamental Policy (1), the High Yield Fund has entered
into undertakings with the Arizona Securities Department, pursuant to which the
Fund has agreed to limit the purchase of securities of issuers in operation for
less than three years ("unseasoned issuers") to 5% of total Fund assets. The
Fund may exceed the 5% limit if, in the future, such Department permits a larger
percentage of assets to be invested in unseasoned issuers. With respect to
Fundamental Policy (16), the High Yield Fund has agreed with the Arkansas
Securities Department to limit its investment in securities which it is
restricted from selling to the public without registration under the Securities
Act of 1933 to 10% of Fund assets. The Fund may invest up to 15% of Fund assets
in such securities if the Arkansas Department changes its position on this
matter in the future or if the Fund's investment policies, at some time in the
future, are no longer subject to the jurisdiction of such Department.
The above limitations, other than those relating to borrowing, are
applicable at the time of investment, and later increases or decreases in
percentages resulting from changes in value of net assets will not result in
violation of such limitations. The Fund interprets Fundamental Policy (8) to
prohibit the purchase of real estate limited partnerships.
TAX-EXEMPT FUND'S FUNDAMENTAL POLICIES
Tax-Exempt Fund's fundamental investment policies are:
1. Not to invest more than 20% of its assets in securities which are not
tax-exempt securities, except for temporary defensive purposes;
2. Not to borrow money, except that borrowings from banks for temporary or
emergency purposes may be made in an amount up to 10% of the Fund's total
assets at the time the loan is made;
3. Not to issue senior securities as defined in the Investment Company Act of
1940 except insofar as the Fund may be deemed to have issued senior
securities by reason of borrowing money for temporary or emergency
purposes or purchasing securities on a when-issued or delayed delivery
basis;
4. Not to purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and sales of
portfolio securities) or sell any securities short;
5. Not to make loans, except that this does not prohibit the purchase of a
portion of an issue of publicly distributed bonds, debentures, notes or
other debt securities, or entry into a repurchase agreement;
6. Not to engage in the business of underwriting securities issued by other
persons except to the extent that the Fund may technically be deemed to be
an underwriter under the Securities Act of 1933 in purchasing and selling
portfolio securities;
7. Not to invest in real estate, real estate mortgage loans, commodities,
commodity futures contracts or interests in oil, gas or other mineral
exploration or development programs, provided that this limitation shall
not prohibit the purchase of securities issued by companies, including
real estate investment trusts, which invest in real estate or interests
therein;
8. Not to invest more than 5% of its total assets in securities of any one
issuer, except securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities;
9. Not to purchase securities of other investment companies, or acquire
voting securities, except in connection with a merger, consolidation,
acquisition or reorganization;
10. Not to invest more than 25% of its total assets in securities the issuers
of which are in the same industry. For purposes of this limitation, the
U.S. government, its agencies or instrumentalities, and state or municipal
governments and their political subdivisions are not considered members of
any industry;
11. Not to pledge, mortgage or hypothecate its assets, except to secure
borrowings permitted by fundamental investment policy number (2) above;
12. Not to write, purchase or sell put or call options or combinations
thereof, except that it may purchase and hold puts or "stand-by
commitments" relating to municipal securities, as described in this
prospectus;
13. Not to invest in securities which are not readily marketable, securities
the disposition of which is restricted under federal securities laws or
repurchase agreements maturing in more than seven days (collectively
27
<PAGE>
"illiquid securities") if, as a result, more than 10% of the Fund's net
assets would be invested in illiquid securities.
For purposes of restrictions (8) and (10) above, each governmental
subdivision, i.e., state, territory, possession of the United States or any
political subdivision of any of the foregoing, including agencies, authorities,
instrumentalities, or similar entities, or of the District of Columbia shall be
considered a separate issuer if its assets and revenues are separate from those
of the governmental body creating it and the security is backed only by its own
assets and revenues. Further, in the case of an industrial development bond, if
the security is backed only by the assets and revenues of a non-governmental
user, then such non-governmental user will be deemed to be the sole issuer. If
an industrial development bond or government issued security is guaranteed by a
governmental or other entity, such guarantee would be considered a separate
security issued by the guarantor.
The above limitations are applicable at the time of investment, and later
increases or decreases in percentages resulting from changes in value or net
assets will not result in violation of such limitations.
CASH FUND'S FUNDAMENTAL POLICIES
Cash Fund's fundamental investment policies are:
1. Not to purchase any securities other than those referred to under
"Security Cash Fund," page 12;
2. Not to borrow money, except that the Fund may borrow for temporary
purposes or to meet redemption requests which might otherwise require the
untimely disposition of a security (not for leveraging) in amounts not
exceeding 10% of the current value of its total assets (including the
amount borrowed) less liabilities (not including the amount borrowed) at
the time the borrowing is made. It is intended that any such borrowing
will be liquidated before additional portfolio securities are purchased;
3. Not to pledge its assets or otherwise encumber them in excess of 10% of
its net assets (taken at market value at the time of pledging) and then
only to secure borrowings effected within the limitations set forth in
restriction 2;
4. Not to make loans of money or securities, except (a) by the purchase of
debt obligations in which the Fund may invest consistent with its
investment objectives and policies or (b) by investment in repurchase
agreements, subject to limitations described under "Security Cash Fund,"
page 12;
5. Not to invest in the securities of an issuer if the officers and directors
of the Fund or Manager own more than 1/2 of 1% of such securities, or if
all such persons together own more than 5% of such securities;
6. Not to purchase a security if, as a result, with respect to 75% of the
value of the Fund's total assets, more than 5% of the value of its total
assets would be invested in the securities of any one issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities);
7. Not to purchase more than 10% of any class of securities of any issuer.
(For purposes of this restriction, all outstanding debt securities of any
issuer are considered one class.)
8. Not to invest more than 25% of the market or other fair value of its total
assets in the securities of issuers, all of which conduct their principal
business activities in the same industry. (For purposes of this
restriction, utilities will be divided according to their services; for
example, gas, gas transmission, electric, water and telephone utilities
will each be treated as being a separate industry. This restriction does
not apply to investment in bank obligations or obligations issued or
guaranteed by the United States Government or its agencies or
instrumentalities.)
9. Not to purchase securities on margin, except for such short-term credits
as are necessary for the clearance of purchases and sales of portfolio
securities;
10. Not to invest more than 5% of the market or other fair value of its total
assets in securities of companies having a record, together with
predecessors, of less than three years of continuous operation. (This
restriction shall not apply to banks or any obligation of the United
States Government, its agencies or instrumentalities.)
11. Not to engage in the underwriting of securities except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security;
12. Not to make short sales of securities;
13. Not to purchase or sell real estate, although it may purchase securities
of issuers which engage in real estate operations, securities which are
secured by interests in real estate, or securities representing interests
in real estate;
28
<PAGE>
14. Not to invest for the purpose of exercising control of management of
another company;
15. Not to purchase oil, gas or other mineral leases, rights, or royalty
contracts or exploration or development programs, except that the Fund may
invest in the securities of companies which invest in or sponsor such
programs;
16. Not to purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;
17. Not to write, purchase or sell puts, calls, or combinations thereof;
18. Not to purchase or sell commodities or commodity futures contracts;
19. Not to issue senior securities as defined in the Investment Company Act of
1940.
In order to permit the sale of shares of Cash Fund in certain states, the
Fund may make commitments more restrictive than the fundamental restrictions
described above. Should the Fund determine that any such commitment is no longer
in the best interest of the Fund and its stockholders, it will revoke the
commitment by terminating sales of its shares in the state(s) involved.
Any investment restriction except restriction 2, which involves a maximum
or minimum percentage of securities or assets shall not be considered to be
violated unless an excess over or a deficiency under the percentage occurs
immediately after, and is caused by, an acquisition or disposition of securities
or utilization of assets by Cash Fund.
OFFICERS AND DIRECTORS
The officers and directors of the Funds and their principal occupations for
at least the last five years are as follows. Unless otherwise noted, the address
of each officer and director is 700 Harrison Street, Topeka, Kansas 66636-0001.
<TABLE>
<CAPTION>
- --------------------------------------------------------------- -------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------- -------------------------------------------------------------
<S> <C>
JOHN D. CLELAND,* President and Director Senior Vice President and Managing Member Representative,
Security Management Company, LLC; Senior Vice President,
Security Benefit Group, Inc. and Security Benefit Life
Insurance Company.
WILLIS A. ANTON, JR., Director Partner, Classic Awning & Design. Prior to October 1991,
3616 Yorkway President, Classic Awning & Design.
Topeka, Kansas 66604
DONALD A. CHUBB, JR.,** Director Business broker, Griffith & Blair Realtors. Prior to 1997,
2222 SW 29th Street President, Neon Tube Light Company, Inc.
Topeka, Kansas 66611
DONALD L. HARDESTY, Director President, Central Research Corporation.
900 Bank IV Tower
Topeka, Kansas 66603
PENNY A. LUMPKIN,** Director Vice President, Palmer News, Inc. Prior to October 1991,
3616 Canterbury Town Road Secretary and Director, Palmer Companies, Inc. (Wholesale
Topeka, Kansas 66610 Periodicals).
MARK L. MORRIS, JR.,** Director President, Mark Morris Associates (Veterinary Research and
5500 SW 7th Street Education).
Topeka, Kansas 66606
JEFFREY B. PANTAGES,* Director Senior Vice President, Security Benefit Group, Inc. and
1266 South Street Security Benefit Life Insurance Company. Prior to June
Needham, MA 02192 1996, President, Chief Investment Officer and Director,
Security Management Company. Prior to April 1992, Managing
Director, Prudential Life.
- --------------------------------------------------------------- -------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------- -------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------- -------------------------------------------------------------
<S> <C>
HUGH L. THOMPSON, Director President, Washburn University.
1700 College
Topeka, KS 66621
JAMES R. SCHMANK, Vice President and Treasurer President (Interim), Treasurer, Chief Fiscal Officer and
Managing Member Representative, Security Management
Company, LLC; Vice President and Interim Chief Investment
Officer, Security Benefit Group, Inc. and Security Benefit
Life Insurance Company.
MARK E. YOUNG, Vice President Vice President, Security Management Company, LLC; Assistant
Vice President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
JANE A. TEDDER, Vice President Vice President and Senior Portfolio Manager, Security
Management Company, LLC; Vice President, Security Benefit
Group, Inc. and Security Benefit Life Insurance Company.
AMY J. LEE, Secretary Secretary, Security Management Company, LLC; Vice
President, Associate General Counsel and Assistant
Secretary, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
BRENDA M. HARWOOD, Assistant Treasurer and Assistant Secretary Assistant Vice President, Assistant Treasurer and Assistant
Secretary, Security Management Company, LLC; Assistant Vice
President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
STEVEN M. BOWSER, Assistant Vice President Assistant Vice President and Portfolio Manager, Security
(Income Fund) Management Company, LLC; Assistant Vice President, Security
Benefit Group, Inc. and Security Benefit Life Insurance
Company. Prior to October 1992, Assistant Vice President
and Portfolio Manager, Federal Home Loan Bank.
GREGORY A. HAMILTON, Assistant Vice President Second Vice President, Security Management Company, LLC,
(Income and Tax-Exempt Funds) Security Benefit Group, Inc. and Security Benefit Life
Insurance Company. Prior to December 1992, First Vice
President and Manager of Investments Division, Mercantile
National Bank.
BARBARA J. DAVISON, Assistant Vice President Compliance Officer, Assistant Vice President and Portfolio
(Cash Fund) Manager, Security Management Company, LLC; Assistant Vice
President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company. Prior to 1996, Assistant
Vice President-Operations, Security Benefit Life Insurance
Company.
CHRISTOPHER D. SWICKARD, Assistant Secretary Assistant Vice President and Assistant Counsel, Security
Benefit Group, Inc. and Security Benefit Life Insurance
Company. Prior to June 1992, student at Washburn
University School of Law.
- --------------------------------------------------------------------------------
</TABLE>
*These directors are deemed to be "interested persons" of the Funds under the
Investment Company Act of 1940, as amended.
**These directors serve on the Funds' audit committee, the purpose of which is
to meet with the independent auditors, to review the work of the auditors, and
to oversee the handling by Security Management Company, LLC of the accounting
functions for the Funds.
- --------------------------------------------------------------------------------
The officers of the Funds hold identical offices with each of the other
Funds managed by the Investment Manager, except Ms. Tedder who is also Vice
President of SBL Fund and Security Equity Fund and Mr. Hamilton who is also
Assistant Vice President of SBL Fund and Security Equity Fund. The directors of
the Funds also serve as directors of each of the other Funds managed by the
Investment Manager. See the table under "Investment Management," page 38, for
positions held by such persons with the Investment Manager. Mr. Young and Ms.
Lee
30
<PAGE>
hold identical offices for the Distributor (Security Distributors, Inc.).
Messrs. Cleland and Schmank are also directors and Vice Presidents of the
Distributor and Ms. Harwood is Treasurer of the Distributor.
REMUNERATION OF DIRECTORS AND OTHERS
The Funds' directors, except those directors who are "interested persons"
of the Funds, receive from each Fund an annual retainer of $1,042 and a fee of
$133 per meeting, plus reasonable travel costs, for each meeting of the board
attended. In addition, certain directors who are members of the Funds' joint
audit committee receive a fee of $100 per hour and reasonable travel costs for
each meeting of the Funds' audit committee attended.
The Funds do not pay any fees to, or reimburse expenses of, their directors
who are considered "interested persons" of the Fund. The aggregate compensation
paid by the Fund to each of the directors during the fiscal year ended December
31, 1996, and the aggregate compensation paid to each of the directors during
calendar year 1996 by all seven of the registered investment companies to which
the Adviser provides investment advisory services (collectively, the "Security
Fund Complex"), are set forth in the accompanying chart. Each of the directors
is a director of each of the other registered investment companies in the
Security Fund Complex.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
PENSION OR RETIREMENT
BENEFITS ACCRUED AS
AGGREGATE COOMPENSATION PART OF FUND EXPENSES ESTIMATED TOTAL
------------------------------ ------------------------------ ANNUAL COMPENSATION FROM
NAME OF TAX- TAX- BENEFITS THE SECURITY FUND
DIRECTOR OF INCOME EXEMPT CASH INCOME EXEMPT CASH UPON COMPLEX, INCLUDING
THE FUND FUND FUND FUND FUND FUND FUND RETIREMENT THE FUNDS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Willis A. Anton, Jr. $1,542 $1,542 $1,542 $0 $0 $0 $0 $18,500
Donald A. Chubb, Jr. 1,571 1,549 1,557 0 0 0 0 18,900
John D. Cleland 0 0 0 0 0 0 0 0
Donald L. Hardesty 1,542 1,542 1,542 0 0 0 0 18,500
Penny A. Lumpkin 1,571 1,549 1,557 0 0 0 0 18,900
Mark L. Morris, Jr. 1,571 1,549 1,557 0 0 0 0 18,900
Jeffrey B. Pantages 0 0 0 0 0 0 0 0
Harold G. Worswick* 0 0 0 0 0 0 0 6,450
Hugh L. Thompson 1,181 1,881 1,181 0 0 0 0 14,175
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Each of the Security Income, Tax-Exempt and Cash Funds have accrued deferred
compensation in the amount of $537 for Mr. Worswick as of December 31, 1996.
- --------------------------------------------------------------------------------
On March 31, 1997, the Funds' officers and directors (as a group)
beneficially owned 48,996; 231; 537; 849 and 27,766 of Class A shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Tax-Exempt Funds, respectively, which represented approximately .556%, .048%,
.322%, .411% and 1.248% of the total outstanding Class A shares on that date.
Cash Fund's officers and directors (as a group) beneficially owned 528,589
shares which represented approximately 1.057% of the total outstanding shares on
March 31, 1997.
HOW TO PURCHASE SHARES
As discussed below, shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Tax-Exempt Funds may be purchased with either a
front-end or contingent deferred sales charge. Shares of Cash Fund are offered
by the Fund without a sales charge. Each of the Funds reserves the right to
withdraw all or any part of the offering made by this prospectus and to reject
purchase orders.
As a convenience to investors and to save operating expenses, the Funds do
not issue certificates for Fund shares except upon written request by the
stockholder.
CORPORATE BOND, LIMITED MATURITY BOND, U.S. GOVERNMENT, HIGH YIELD AND
TAX-EXEMPT FUNDS
Security Distributors, Inc. (the "Distributor"), 700 SW Harrison, Topeka,
Kansas, a wholly-owned subsidiary of Security Benefit Group, Inc., is principal
underwriter for Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield and Tax-Exempt Funds. Investors may purchase shares of these Funds through
authorized dealers who are members of the National Association of Securities
Dealers, Inc. In addition, banks and other financial institutions may make
shares of the Funds available to their customers. (Banks and other financial
institutions that make shares of the Funds available to their customers in Texas
must be registered with that state as securities dealers.) The minimum initial
purchase must be $100 and subsequent purchases must be $100 unless made
31
<PAGE>
through an Accumulation Plan which allows a minimum initial purchase of $100 and
subsequent purchases of $20. (See "Accumulation Plan," page 38.) An application
may be obtained from the Distributor.
Orders for the purchase of shares of the Funds will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by the Distributor (generally as of the
close of the Exchange on that day) plus the sales charge in the case of Class A
shares of the Funds. Orders received by dealers or other firms prior to the
close of the Exchange and received by the Distributor prior to the close of its
business day will be confirmed at the offering price effective as of the close
of the Exchange on that day. Dealers and other financial services firms are
obligated to transmit orders promptly.
ALTERNATIVE PURCHASE OPTIONS
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Tax-Exempt Funds offer two classes of shares:
CLASS A SHARES - FRONT-END LOAD OPTION. Class A shares are sold with a
sales charge at the time of purchase. Class A shares are not subject to a sales
charge when they are redeemed (except that shares sold in an amount of
$1,000,000 or more without a front-end sales charge will be subject to a
contingent deferred sales charge of 1% for one year). See Appendix A for a
discussion of "Rights of Accumulation" and "Statement of Intention," which
options may serve to reduce the front-end sales charge.
CLASS B SHARES - BACK-END LOAD OPTION. Class B shares are sold without a
sales charge at the time of purchase, but are subject to a deferred sales charge
if they are redeemed within five years of the date of purchase. Class B shares
will automatically convert tax-free to Class A shares at the end of eight years
after purchase.
The decision as to which class is more beneficial to an investor depends on
the amount and intended length of the investment. Investors who would rather pay
the entire cost of distribution at the time of investment, rather than spreading
such cost over time, might consider Class A shares. Other investors might
consider Class B shares, in which case 100% of the purchase price is invested
immediately, depending on the amount of the purchase and the intended length of
investment. The Funds will not normally accept any purchase of Class B shares in
the amount of $250,000 or more.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell.
CLASS A SHARES
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Tax-Exempt Funds are offered at net asset value plus an initial
sales charge as follows:
<TABLE>
<CAPTION>
- ------------------------------------------- ---------------------------------------------------------------------------------
SALES CHARGE
---------------------------------------------------------------------------------
APPLICABLE PERCENTAGE
AMOUNT OF PURCHASE PERCENTAGE OF PERCENTAGE OF NET REALLOWABLE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED TO DEALERS
- ------------------------------------------- -------------------- ----------------------------------------- ------------------
<S> <C> <C> <C>
Less than $50,000........................ 4.75% 4.99% 4.00%
$50,000 but less than $100,000........... 3.75 3.90 3.00
$100,000 but less than $250,000.......... 2.75 2.83 2.20
$250,000 but less than $1,000,000........ 1.75 1.78 1.40
$1,000,000 or more....................... None None (See below)
- ------------------------------------------- -------------------- ----------------------------------------- ------------------
</TABLE>
Purchases of Class A shares of these Funds in amounts of $1,000,000 or more
are at net asset value (without a sales charge), but are subject to a contingent
deferred sales charge of 1% in the event of redemption within one year following
purchase. For a discussion of the contingent deferred sales charge, see
"Calculation and Waiver of Contingent Deferred Sales Charges" page 35. The
Distributor will pay a commission to dealers on purchases of $1,000,000 or more
as follows: 1.00% on sales up to $5,000,000, plus .50% on sales of $5,000,000 or
more up to $10,000,000, and .10% on any amount of $10,000,000 or more.
The Investment Manager may, at its expense, pay a service fee to dealers
who satisfy certain criteria established by the Investment Manager from time to
time relating to the volume of their sales of Class A shares of Tax-Exempt Fund
and certain other Security Funds during prior periods and certain other factors,
including
32
<PAGE>
providing to their clients who are stockholders of the Funds certain services,
which include assisting in maintaining records, processing purchase and
redemption requests and establishing shareholder accounts, assisting
shareholders in changing account options or enrolling in specific plans, and
providing shareholders with information regarding the Funds and related
developments. Service fees are paid quarterly and may be discontinued at any
time.
SECURITY INCOME FUND'S CLASS A DISTRIBUTION PLAN
As discussed in the prospectus, each of Corporate Bond, Limited Maturity
Bond, U.S. Government and High Yield Funds has a Distribution Plan for its Class
A shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The
Plan authorizes these Funds to pay an annual fee to the Distributor of .25% of
the average daily net asset value of the Class A shares of each Fund to finance
various activities relating to the distribution of such shares of the Funds to
investors. These expenses include, but are not limited to, the payment of
compensation (including compensation to securities dealers and other financial
institutions and organizations) to obtain various administrative services for
each Fund. These services include, among other things, processing new
shareholder account applications and serving as the primary source of
information to customers in answering questions concerning each Fund and their
transactions with the Fund. The Distributor is also authorized to engage in
advertising, the preparation and distribution of sales literature and other
promotional activities on behalf of each Fund. The Distributor is required to
report in writing to the Board of Directors of Income Fund and the board will
review at least quarterly the amounts and purpose of any payments made under the
Plan. The Distributor is also required to furnish the board with such other
information as may reasonably be requested in order to enable the board to make
an informed determination of whether the Plan should be continued.
The Plan became effective on August 15, 1985, and was renewed by the
directors of Income Fund on February 7, 1997, as to each of Corporate Bond and
U.S. Government Funds. The Plan was adopted with respect to Limited Maturity
Bond on October 21, 1994 and was renewed by the directors of Income Fund on
February 7, 1997. The Plan was adopted with respect to the High Yield Fund on
May 3, 1996, and renewed by the directors of Income Fund on February 7, 1997.
The Plan will continue from year to year, provided that such continuance is
approved at least annually by a vote of a majority of the Board of Directors of
each Fund, including a majority of the independent directors cast in person at a
meeting called for the purpose of voting on such continuance. The Plan can also
be terminated at any time on 60 days' written notice, without penalty, if a
majority of the disinterested directors or the Class A shareholders vote to
terminate the Plan. Any agreement relating to the implementation of the Plan
terminates automatically if it is assigned. The Plan may not be amended to
increase materially the amount of payments thereunder without approval of the
Class A shareholders of the Funds.
Because all amounts paid pursuant to the Distribution Plan are paid to the
Distributor, the Investment Manager and its officers, directors and employees,
including Messrs. Cleland and Pantages (directors of the Fund), Messrs. Young,
Schmank, Hamilton and Swickard, Ms. Tedder, Ms. Lee and Ms. Harwood (officers of
the Fund), all may be deemed to have a direct or indirect financial interest in
the operation of the Distribution Plan. None of the independent directors have a
direct or indirect financial interest in the operation of the Distribution Plan.
Benefits from the Distribution Plan may accrue to the Funds and their
stockholders from the growth in assets due to sales of shares to the public
pursuant to the Distribution Agreement with the Distributor. Increases in the
Corporate Bond, Limited Maturity Bond, U.S. Government and High Yield Funds' net
assets from sales pursuant to its Distribution Plan and Agreement may benefit
shareholders by reducing per share expenses, permitting increased investment
flexibility and diversification of Corporate Bond, Limited Maturity Bond, U.S.
Government and High Yield Funds' assets, and facilitating economies of scale
(e.g., block purchases) in the Funds' securities transactions.
Distribution fees paid by Class A stockholders of Corporate Bond, Limited
Maturity Bond, U.S. Government and High Yield Funds to the Distributor under the
Plan for the year ended December 31, 1996, totaled $248,326. In addition,
$96,790 was carried forward from the previous plan year. Approximately $177,429
of this amount was paid as a service fee to broker/dealers and $171,996 was
spent on promotions, resulting in a deficit of $4,309 going into the 1997 plan
year. The amount spent on promotions consists primarily of amounts reimbursed to
dealers for expenses (primarily travel, meals and lodging) incurred in
connection with attendance by their representatives at educational meetings
concerning Corporate Bond and U.S. Government Funds. The Distributor may engage
the services of an affiliated advertising agency for advertising, preparation of
sales literature and other distribution-related activities.
33
<PAGE>
CLASS B SHARES
Class B shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Tax-Exempt Funds are offered at net asset value, without an
initial sales charge. With certain exceptions, these Funds may impose a deferred
sales charge on shares redeemed within five years of the date of purchase. No
deferred sales charge is imposed on amounts redeemed thereafter. If imposed, the
deferred sales charge is deducted from the redemption proceeds otherwise payable
to the stockholder. The deferred sales charge is retained by the Distributor.
Whether a contingent deferred sales charge is imposed and the amount of the
charge will depend on the number of years since the stockholder made a purchase
payment from which an amount is being redeemed, according to the following
schedule:
YEAR SINCE PURCHASE PAYMENT WAS MADE CONTINGENT DEFERRED SALES CHARGE
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and Following 0%
Class B shares (except shares purchased through the reinvestment of
dividends and other distributions with respect to Class B shares) will
automatically convert on the eighth anniversary of the date such shares were
purchased to Class A shares which are subject to a lower, or in the case of
Tax-Exempt Fund, no distribution fee. This automatic conversion of Class B
shares will take place without imposition of a front-end sales charge or
exchange fee. (Conversion of Class B shares represented by stock certificates
will require the return of the stock certificates to the Investment Manager.)
All shares purchased through reinvestment of dividends and other distributions
with respect to Class B shares ("reinvestment shares") will be considered to be
held in a separate subaccount. Each time any Class B shares (other than those
held in the subaccount) convert to Class A shares, a pro rata portion of the
reinvestment shares held in the subaccount will also convert to Class A shares.
Class B shares so converted will no longer be subject to the higher expenses
borne by Class B shares. Because the net asset value per share of the Class A
shares may be higher or lower than that of the Class B shares at the time of
conversion, although the dollar value will be the same, a shareholder may
receive more or less Class A shares than the number of Class B shares converted.
Under current law, it is the Funds' opinion that such a conversion will not
constitute a taxable event under federal income tax law. In the event that this
ceases to be the case, the Board of Directors will consider what action, if any,
is appropriate and in the best interests of the Class B stockholders.
CLASS B DISTRIBUTION PLAN
Each of Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield
and Tax-Exempt Funds bear some of the costs of selling its Class B shares under
a Distribution Plan adopted with respect to its Class B shares ("Class B
Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("1940 Act"). This Plan was adopted by the Board of Directors of Corporate
Bond, U.S. Government and Tax-Exempt Funds on July 23, 1993 and was renewed on
February 7, 1997. The Plan was adopted with respect to Limited Maturity Bond
Fund on October 21, 1994 and was renewed on February 7, 1997. The Plan was
adopted with respect to the High Yield Fund on May 3, 1996, and renewed by the
directors of Income Fund on February 7, 1997. The Plan provides for payments at
an annual rate of 1.00% of the average daily net asset value of Class B shares.
Amounts paid by the Funds are currently used to pay dealers and other firms that
make Class B shares available to their customers (1) a commission at the time of
purchase normally equal to 4.00% of the value of each share sold and (2) a
service fee payable for the first year, initially, and for each year thereafter,
quarterly, in an amount equal to .25% annually of the average daily net asset
value of Class B shares sold by such dealers and other firms and remaining
outstanding on the books of the Funds.
Rules of the National Association of Securities Dealers, Inc. ("NASD")
limit the aggregate amount that each Fund may pay annually in distribution costs
for the sale of its Class B shares to 6.25% of gross sales of Class B
34
<PAGE>
shares since the inception of the Distribution Plan, plus interest at the prime
rate plus 1% on such amount (less any contingent deferred sales charges paid by
Class B shareholders to the Distributor). The Distributor intends, but is not
obligated, to continue to pay or accrue distribution charges incurred in
connection with the Class B Distribution Plan which exceed current annual
payments permitted to be received by the Distributor from the Funds. The
Distributor intends to seek full payment of such charges from the Fund (together
with annual interest thereon at the prime rate plus 1%) at such time in the
future as, and to the extent that, payment thereof by the Funds would be within
permitted limits.
Each Fund's Class B Distribution Plan may be terminated at any time by vote
of its directors who are not interested persons of the Fund as defined in the
1940 Act or by vote of a majority of the outstanding Class B shares. In the
event the Class B Distribution Plan is terminated by the Class B stockholders or
the Funds' Board of Directors, the payments made to the Distributor pursuant to
the Plan up to that time would be retained by the Distributor. Any expenses
incurred by the Distributor in excess of those payments would be absorbed by the
Distributor. Distribution fees paid by Class B stockholders of Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield and Tax-Exempt Funds to the
Distributor under the Plan for the year ended December 31, 1996, totaled
$91,597. The Funds make no payments in connection with the sales of their Class
B shares other than the distribution fee paid to the Distributor.
CALCULATION AND WAIVER OF CONTINGENT DEFERRED SALES CHARGES
Any contingent deferred sales charge imposed upon redemption of Class A shares
(purchased in an amount of $1,000,000 or more) and Class B shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. No contingent deferred sales charge is imposed
upon redemption of amounts derived from (1) increases in the value above the net
cost of such shares due to increases in the net asset value per share of the
Fund; (2) shares acquired through reinvestment of income dividends and capital
gain distributions; or (3) Class A shares (purchased in an amount of $1,000,000
or more) held for more than one year or Class B shares held for more than five
years. Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed.
The contingent deferred sales charge is waived: (1) following the death of
a stockholder if redemption is made within one year after death, (2) upon the
disability (as defined in Section 72(m)(7) of the Internal Revenue Code) of a
stockholder prior to age 65 if redemption is made within one year after the
disability, provided such disability occurred after the stockholder opened the
account; (3) in connection with required minimum distributions in the case of an
IRA, SAR-SEP or Keogh or any other retirement plan qualified under Section
401(a), 401(k) or 403(b) of the Code; and (4) in the case of distributions from
retirement plans qualified under Section 401(a) or 401(k) of the Internal
Revenue Code due to (i) returns of excess contributions to the plan, (ii)
retirement of a participant in the plan, (iii) a loan from the plan (repayment
of loans, however, will constitute new sales for purposes of assessing the
CDSC), (iv) "financial hardship" of a participant in the plan, as that term is
defined in Treasury Regulation Section 1.401(k)-1(d)(2), as amended from time to
time, (v) termination of employment of a participant in the plan, (vi) any other
permissible withdrawal under the terms of the plan. The contingent deferred
sales charge will also be waived in the case of redemptions of shares of the
Funds pursuant to a Systematic Withdrawal Program (refer to page 38 for
details).
ARRANGEMENTS WITH BROKER/DEALERS AND OTHERS
The Investment Manager or Distributor, from time to time, will provide
promotional incentives or pay a bonus to certain dealers whose representatives
have sold or are expected to sell significant amounts of the Funds and/or
certain other Funds managed by the Investment Manager. Such promotional
incentives will include payment for attendance (including travel and lodging
expenses) by qualifying registered representatives (and members of their
families) to sales seminars at luxury resorts within or without the United
States. Bonus compensation may include reallowance of the entire sales charge
and may also include, with respect to Class A shares, an amount which exceeds
the entire sales charge and, with respect to Class B shares, an amount which
exceeds the maximum commission. The Distributor, or the Investment Manager, may
also provide financial assistance to certain dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns, and/or shareholder services and programs
regarding one or more of the funds managed by the Investment Manager. Certain of
the promotional incentives or bonuses may be financed by
35
<PAGE>
payments to the Distributor under a Rule 12b-1 Distribution Plan. The payment of
promotional incentives and/or bonuses will not change the price an investor will
pay for shares or the amount that the Funds will receive from such sale. No
compensation will be offered to the extent it is prohibited by the laws of any
state or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. ("NASD"). A Dealer to whom substantially the entire sales charge
of Class A shares is reallowed may be deemed to be an "underwriter" under
federal securities laws.
The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the funds for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above. Banks currently are prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Fund's Board of Directors would consider what
action, if any, would be appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
The Investment Manager or Distributor also may pay a marketing allowance to
dealers who meet certain eligibility criteria. This allowance is paid with
reference to new sales of Fund shares (except shares of Cash Fund) in a calendar
year and may be discontinued at any time. To be eligible for this allowance in
any given year, the dealer must sell a minimum of $2,000,000 of Class A and
Class B shares during that year. The applicable marketing allowance factors are
set forth below.
- --------------------------------------------------------------------------------
APPLICABLE MARKETING
AGGREGATE NEW SALES ALLOWANCE FACTOR*
- --------------------------------------------------------------------------------
Less than $2 million................................... .00%
$2 million but less than $5 million.................... .15%
$5 million but less than $10 million................... .25%
$10 million but less than $15 million.................. .35%
$15 million but less than $20 million.................. .50%
$20 million or more.................................... .75%
- --------------------------------------------------------------------------------
*The maximum marketing allowance factor applicable per this schedule will be
applied to all new sales in the calendar year to determine the marketing
allowance payable for such year.
- --------------------------------------------------------------------------------
For the calendar year ended December 31, 1996, the following dealers
received a marketing allowance:
DEALER AMOUNT
Legend Equities Corp. $ 45,205
Investment Advisors & Consultants, Inc. 15,177
Financial Network Investment Corp. 13,538
VSR Financial Services, Inc. 6,281
Berthel Fisher & Company Financial Services, Inc. 6,038
Hepfner Securities Corp. 5,827
OFG Financial Services, Inc. 4,086
Lincoln Investment Planning, Inc. 3,827
George K. Baum & Co., Inc. 3,799
---------
$103,779
=========
CASH FUND
Cash fund offers a single class of shares which is offered at net asset
value next determined after an order is accepted. There is no sales charge or
load. The minimum initial investment in Cash Fund is $100 for each account.
Subsequent investments may be made in any amount of $20 or more. Cash Fund
purchases may be made in any of the following ways:
36
<PAGE>
1. BY MAIL.
(a) A check or negotiable bank draft should be sent to:
Security Cash Fund
P.O. Box 2548
Topeka, Kansas 66601-2548
(b) Make check or draft payable to "Security Cash Fund."
(c) For initial investment include a completed investment application
found at the back of the prospectus.
2. BY WIRE.
(a) Call the Fund to advise of the investment. The Fund will supply an
account number at the time of the initial investment and provide
instructions for having your bank wire federal funds.
(b) Wire federal funds to: Bank IV of Topeka
Attention Security Distributors, Inc.
Topeka, Kansas 66603
Include investor's name and the account number.
(c) For initial investment, send a completed investment application to the
Fund at the above address.
3. THROUGH BROKER/DEALERS. Investors may, if they wish, invest in Cash Fund by
purchasing shares through registered broker/dealers. Such broker/dealers
who process orders on behalf of their customers may charge a fee for their
services. Investments made directly without the assistance of a
broker/dealer are without charge.
Since Cash Fund invests in money market securities which require immediate
payment in federal funds, monies received from the sales of its shares must be
monies held by a commercial bank and be on deposit at one of the Federal Reserve
Banks. A record date for each stockholder's investment is established each
business day and used to distribute the following day's dividend. If federal
funds are received prior to 2:00 p.m. (Central time) the investment will be made
on that day and the investor will receive the following day's dividend. Federal
funds received after 2:00 p.m. on any business day will not be invested until
the following business day. Cash Fund will not be responsible for any delays in
the wire transfer system. All checks are accepted subject to collection at full
face value in United States funds and must be drawn in United States dollars on
a United States bank.
PURCHASES AT NET ASSET VALUE
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Tax-Exempt Funds may be purchased at net asset value by (1)
directors, officers and employees of the Funds, the Funds' Investment Manager or
Distributor; directors, officers and employees of Security Benefit Life
Insurance Company and its subsidiaries; agents licensed with Security Benefit
Life Insurance Company; spouses or minor children of any such agents; as well as
the following relatives of any such directors, officers and employees (and their
spouses): spouses, grandparents, parents, children, grandchildren, siblings,
nieces and nephews; (2) any trust, pension, profit sharing or other benefit plan
established by any of the foregoing corporations for persons described above;
(3) retirement plans where third party administrators of such plans have entered
into certain arrangements with the Distributor or its affiliates provided that
no commission is paid to dealers; and (4) officers, directors, partners or
registered representatives (and their spouses and minor children) of
broker/dealers who have a selling agreement with the Distributor. Such sales are
made upon the written assurance of the purchaser that the purchase is made for
investment purposes and that the securities will not be transferred or resold
except through redemption or repurchase by or on behalf of the Funds.
Life agents and associated personnel of broker/dealers must obtain a
special application from their employer or from the Distributor, in order to
qualify for such purchases.
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Tax-Exempt Funds may also be purchased at net asset value when
the purchase is made on the recommendation of (i) a registered investment
adviser, trustee or financial intermediary who has authority to make investment
decisions on behalf of the investor; or (ii) a certified financial planner or
registered broker-dealer who either charges periodic fees to its customers for
financial planning, investment advisory or asset management services, or
provides such services in connection with the establishment of an investment
account for which a comprehensive "wrap fee" is imposed. The Distributor must be
notified when a purchase is made that qualifies under this provision.
37
<PAGE>
ACCUMULATION PLAN
Investors in Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield or Tax-Exempt Fund may purchase shares on a periodic basis under an
Accumulation Plan which provides for an initial investment of $100 minimum, and
subsequent investments of $20 minimum at any time. An Accumulation Plan is a
voluntary program, involving no obligation to make periodic investments, and is
terminable at will. Payments are made by sending a check to the Distributor who
(acting as an agent for the dealer) will purchase whole and fractional shares of
the Funds as of the close of business on the day such payment is received. A
confirmation and statement of account will be sent to the investor following
each investment. Certificates for whole shares will be issued upon request. No
certificates will be issued for fractional shares which may be withdrawn only by
redemption for cash.
Investors may choose to use "Secur-O-Matic" (automatic bank draft) to make
their Fund purchases. There is no additional charge for using Secur-O-Matic. An
application may be obtained from the Funds.
SYSTEMATIC WITHDRAWAL PROGRAM
A Systematic Withdrawal Program may be established by stockholders who wish
to receive regular monthly, quarterly, semiannual or annual payments of $25 or
more. A Program may also be based upon the liquidation of a fixed or variable
number of shares provided that the minimum amount is withdrawn. However, the
Funds do not recommend this (or any other amount) as an appropriate withdrawal.
Shares with a current offering price of $5,000 or more must be deposited with
the Investment Manager acting as agent for the stockholder under the Program.
There is no service charge on the Program as the Investment Manager pays the
costs involved.
Sufficient shares will be liquidated at net asset value to meet the
specified withdrawals. Liquidation of shares may deplete or possibly use up the
investment, particularly in the event of a market decline. Payments cannot be
considered as actual yield or income since part of such payments is a return of
capital and may constitute a taxable event to the stockholder. The maintenance
of a Withdrawal Program concurrently with purchases of additional shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield or Tax-Exempt
Fund would be disadvantageous because of the sales commission payable in respect
to such purchases. During the withdrawal period, no payments will be accepted
under an Accumulation Plan. Income dividends and capital gains distributions are
automatically reinvested at net asset value. If an investor has an Accumulation
Plan in effect, it must be terminated before a Systematic Withdrawal Program may
be initiated.
The stockholder receives confirmation of each transaction showing the
source of the payment and the share balance remaining in the Program. A Program
may be terminated on written notice by the stockholder or the Funds, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account.
A stockholder may establish a Systematic Withdrawal Program with respect to
Class B shares without the imposition of any applicable contingent deferred
sales charge, provided that such withdrawals do not in any 12-month period,
beginning on the date the Program is established, exceed 10% of the value of the
account on that date ("Free Systematic Withdrawals"). Free Systematic
Withdrawals are not available if a Program established with respect to Class B
shares provides for withdrawals in excess of 10% of the value of the account in
any Program year and, as a result, all withdrawals under such a Program are
subject to any applicable contingent deferred sales charge. Free Systematic
Withdrawals will be made first by redeeming those shares that are not subject to
the contingent deferred sales charge and then by redeeming shares held the
longest. The contingent deferred sales charge applicable to a redemption of
Class B shares requested while Free Systematic Withdrawals are being made will
be calculated as described under "Calculation and Waiver of Contingent Deferred
Sales Charges," page 35. A Systematic Withdrawal form may be obtained from the
Funds.
INVESTMENT MANAGEMENT
Security Management Company, LLC (the "Investment Manager"), 700 Harrison
Street, Topeka, Kansas, has served as investment adviser to Income Fund,
Tax-Exempt Fund and Cash Fund, respectively, since September 14, 1970, October
7, 1983 and June 23, 1980. The current Investment Advisory Contracts for Income
Fund, Tax-Exempt Fund and Cash Fund, respectively, are dated March 27, 1987,
October 7, 1983 and June 23, 1980, and were renewed by the Funds' Board of
Directors at a regular meeting held February 7, 1997. The Investment Manager
also acts as investment adviser to Security Equity Fund, Security Growth and
Income Fund, Security Ultra Fund and SBL Fund. The Investment Manager is a
limited liability company controlled by its
38
<PAGE>
members, Security Benefit Life Insurance Company and Security Benefit Group,
Inc. ("SBG"). SBG is an insurance and financial services holding company
wholly-owned by Security Benefit Life Insurance Company, 700 Harrison Street,
Topeka, Kansas 66636-0001. Security Benefit Life, a mutual life insurance
company with over $15.5 billion of insurance in force, is incorporated under the
laws of Kansas.
Pursuant to the Investment Advisory Contracts, the Investment Manager
furnishes investment advisory, statistical and research services to the Funds,
supervises and arranges for the purchase and sale of securities on behalf of the
Funds, provides for the maintenance and compilation of records pertaining to the
investment advisory functions, and also makes certain guarantees with respect to
the Funds' annual expenses. The Investment Manager guarantees that the aggregate
annual expenses of the respective Funds (including for any fiscal year, the
management fee, but excluding interest, taxes, brokerage commissions,
extraordinary expenses and Class B distribution fees) shall not for Corporate
Bond, Limited Maturity Bond, U.S. Government and High Yield Funds exceed the
level of expenses which the Fund is permitted to bear under the most restrictive
expense limitation imposed by any state in which shares of the Fund are then
qualified for sale and shall not for Tax-Exempt and Cash Funds exceed 1% of the
Fund's average net assets for the year. (The Investment Manager is not aware of
any state that currently imposes limits on the level of mutual fund expenses.)
The Investment Manager will contribute such funds or waive such portion of its
management fee as may be necessary to insure that the aggregate expenses of the
Funds will not exceed the guaranteed maximum.
For its services, the Investment Manager is entitled to receive
compensation on an annual basis equal to .5% of the average daily closing value
of the Corporate Bond, Limited Maturity Bond, U.S. Government, Tax-Exempt and
Cash Fund's net assets and .60% of the average daily closing value of the High
Yield Fund, each computed on a daily basis and payable monthly. During the
fiscal years ended December 31, 1996, 1995 and 1994, the Funds paid the
following amounts to the Investment Manager for its services: 1996 - $534,366;
1995 - $549,076; and 1994 - $560,388 for Income Fund; 1996 - $120,946; 1995 -
$128,492; and 1994 - $146,469 for Tax-Exempt Fund; and 1996 - $247,304; 1995 -
$254,139; and 1994 - $285,251 for Cash Fund. For the years ended December 31,
1996, 1995 and 1994, the Investment Manager agreed to limit the total expenses
(including its compensation, but excluding interest, taxes and extraordinary
expenses and Class B distribution fees) of Corporate Bond and U.S. Government
Funds to 1.1% of the average daily net assets of the respective Funds.
Accordingly, the Investment Manager reimbursed the U.S. Government Fund in the
following amounts: 1996 - $60,974; 1995 - $16,803; and 1994 - $11,684; and
Corporate Bond Fund: 1996 - $10,663; 1995 - $15,121; and 1994 - $4,276. For the
year ended December 31, 1995, expenses incurred by Cash Fund exceeded 1% of the
average net assets and accordingly, the Investment Manager reimbursed Cash Fund
in the amount of $12,968. For the years ended December 31, 1996, 1995 and 1994,
expenses incurred by Tax-Exempt Fund exceeded 1% of the average net assets and
accordingly, the Investment Manager reimbursed Tax-Exempt Fund 1996 - $2,358;
1995 - $4,504; and 1994 - $1,505. The Investment Manager agreed to waive all of
the management fees for the Limited Maturity Bond Fund through July 1, 1995. In
addition, the Investment Manager agreed to waive the investment advisory fees of
Limited Maturity Bond, U.S. Government and High Yield Funds for the fiscal year
ended December 31, 1996.
Each Fund will pay all of its expenses not assumed by the Investment
Manager or the Distributor including organization expenses; directors' fees;
fees and expenses of custodian; taxes and governmental fees; interest charges;
membership dues; brokerage commissions; reports; proxy statements; costs of
stockholder and other meetings; Class B distribution fees; and legal, auditing
and accounting expenses. Each Fund will also pay for the preparation and
distribution of the prospectus to its stockholders and all expenses in
connection with its registration under federal and state securities laws. Each
Fund will pay nonrecurring expenses as may arise, including litigation affecting
it.
The Investment Advisory Contracts between Security Management Company, LLC
and Income Fund, Tax-Exempt Fund and Cash Fund, dated March 27, 1987, October 7,
1983 and June 23, 1980, respectively, expire on April 1, 1998, May 1, 1998 and
June 1, 1998. The contracts are renewable annually by the Funds' Board of
Directors or by a vote of a majority of a Fund's outstanding securities and, in
either event, by a majority of the board who are not parties to the contract or
interested persons of any such party. The contracts provide that they may be
terminated without penalty at any time by either party on 60 days' notice and
are automatically terminated in the event of assignment.
Pursuant to Administrative Services Agreements with the Funds dated April
1, 1987, the Investment Manager also acts as the administrative agent for the
Funds and as such performs administrative functions and the
39
<PAGE>
bookkeeping, accounting and pricing functions for the Funds. For these services
the Investment Manager receives, on an annual basis, a fee of .09% of the
average net assets of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Tax-Exempt Funds and .045% of the average net assets of Cash
Fund, calculated daily and payable monthly. During the fiscal years ended
December 31, 1996, 1995 and 1994, the Funds paid the following amounts for
administrative services: 1996 - $95,487; 1995 - $98,667; and 1994 - $100,870 for
Income Fund; 1996 - $22,530; 1995 - $23,129; and 1994 - $26,364 for Tax-Exempt
Fund; and 1996 - $21,721; 1995 - $22,898; and 1994 - $25,703 for Cash Fund.
Under the Administrative Services Agreements identified above, the
Investment Manager also acts as the transfer agent for the Funds. As such, the
Investment Manager performs all shareholder servicing functions, including
transferring record ownership, processing purchase and redemption transactions,
answering inquiries, mailing stockholder communications and acting as the
dividend disbursing agent. For these services, the Investment Manager receives
an annual maintenance fee of $8.00 per account, a fee of $1.00 per shareholder
transaction, and a fee of $1.00 ($.50 for Cash Fund) per dividend transaction.
During the fiscal years ended December 31, 1996, 1995, and 1994, the Funds paid
the following amounts for transfer agency services: 1996 - $128,776; 1995 -
$127,227; and 1994 - $122,198 for Income Fund; 1996 - $16,538; 1995 - $16,716;
1994 - $18,811 for Tax-Exempt Fund; and 1996 - $130,682; 1995 - $152,798; and
1994 - $139,429 for Cash Fund.
The total expenses of the Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield, Tax-Exempt and Cash Funds for the fiscal year ended
December 31, 1996 were $936,593; $52,769; $75,838; $40,482; $208,821; and
$482,615; respectively. The expense ratio for fiscal year 1996 was 1.01% and
1.85%, respectively of the average net assets of Class A and B shares of the
Corporate Bond Fund and .90% and 1.88%, respectively, of the average net assets
of Class A and Class B shares of Limited Maturity Bond Fund. The expense ratio
for the fiscal year 1996 was .65% and 1.86%, respectively, of the net assets of
Class A and Class B shares of U.S. Government Fund and .78%, 2.01% and 1.01%
respectively, of the average net assets of the Class A and Class B shares of
Tax-Exempt Fund and Cash Fund. The expense figures quoted are net of expense
reimbursements and by fees paid indirectly as a result of earnings credits
earned on overnight cash balances. For the period August 5, 1996 (date of
inception) to December 31, 1996 the expense ratios were 1.54% for Class A shares
and 2.26% for Class B shares of High Yield Fund, respectively.
The following persons are affiliated with the Funds and also with the
Investment Manager in these capacities:
<TABLE>
<CAPTION>
- ---------------------- ------------------------------------------ -----------------------------------------------------------
NAME POSITIONS WITH THE FUNDS POSITIONS WITH SECURITY MANAGEMENT COMPANY, LLC
- ---------------------- ------------------------------------------ -----------------------------------------------------------
<S> <C> <C>
James R. Schmank Vice President and Treasurer President (Interim), Treasurer, Chief Fiscal Officer and
Managing Member Representative
John D. Cleland President and Director Senior Vice President and Managing Member Representative
Jane A. Tedder Vice President Vice President and Senior Portfolio Manager
Mark E. Young Vice President Vice President-Operations
Amy J. Lee Secretary Secretary
Brenda M. Harwood Assistant Treasurer and Assistant Assistant Vice President, Assistant Treasurer
Secretary and Assistant Secretary
Steven M. Bowser Assistant Vice President Assistant Vice President and Portfolio Manager
Gregory A. Hamilton Assistant Vice President Second Vice President
Barbara J. Davison Assistant Vice President Compliance Officer, Assistant Vice President
and Portfolio Manager
- ---------------------- ------------------------------------------ -----------------------------------------------------------
</TABLE>
PORTFOLIO MANAGEMENT
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield,
Tax-Exempt and Cash Funds will be managed by the Fixed Income Team of the
Investment Manager consisting of John Cleland, Chief Investment Strategist, Greg
Hamilton, Jane Tedder, Tom Swank, Steve Bowser, Barb Davison and Elaine Miller.
Greg Hamilton, Second Vice President of the Investment Manager has day-to-day
responsibility for managing Corporate Bond, Limited Maturity Bond and Tax-Exempt
Funds and has managed the Funds since January 1996. Steve Bowser, Assistant Vice
President and Portfolio Manager of the Investment Manager, has day-to-day
responsibility for managing U.S. Government Fund since 1995. Tom Swank, Second
Vice President and Portfolio Manager for
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the Investment Manager has had day-to-day responsibility for managing High Yield
Fund since its inception in 1996.
John D. Cleland has been involved in the securities industry for more than
30 years. Before joining the Investment Manager in 1968, he was involved in the
investment business in securities and residential and commercial real estate for
approximately ten years. Mr. Cleland earned a Bachelor of Science degree from
the University of Kansas and an M.B.A. from Wharton School of Finance,
University of Pennsylvania.
Greg Hamilton has been in the investment field since 1983. He received his
Bachelor of Arts degree in Business from Washburn University in 1984. Prior to
joining Security Management Company in January of 1993, he was First Vice
President, Treasurer and Portfolio Manager with Mercantile National Bank, Los
Angeles, California, from 1990 to 1993. From 1986 to 1990, he was Managing
Director of Consulting Services for Sendero Corporation, Scottsdale, Arizona.
Prior to Sendero Corporation, he was employed as Fixed Income Research Analyst
at Peoples Heritage Savings and Loan from 1983 to 1986.
Mr. Bowser joined the Investment Manager in 1992 and has managed the U.S.
Government Fund since 1995. Prior to joining the Investment Manager, he was
Assistant Vice President and Portfolio Manager with the Federal Home Loan Bank
of Topeka from 1989 to 1992. He was employed at the Federal Reserve Bank of
Kansas City in 1988 and began his career with the Farm Credit System from 1982
to 1987, serving as a Senior Financial Analyst and Assistant Controller. He
graduated with a Bachelor of Science degree from Kansas State University in
1982.
Tom Swank, Portfolio Manager of the Investment Manager, has over ten years
of experience in the investment field. He is a Chartered Financial Analyst.
Prior to joining the Investment Manager in 1992, he was an Investment
Underwriter and Portfolio Manager for U.S. West Financial Services, Inc. from
1986 to 1992. From 1984 to 1986, he was a Commercial Credit Officer for United
Bank of Denver. From 1982 to 1984, he was employed as a Bank Holding Company
examiner for the Federal Reserve Bank of Kansas City - Denver Branch. Mr. Swank
graduated from Miami University in Ohio with a Bachelor of Science degree in
finance in 1982 and earned a Master of Business Administration degree from the
University of Colorado.
CODE OF ETHICS
The Funds, the Investment Manager and the Distributor have a written Code
of Ethics which requires all access persons to obtain prior clearance before
engaging in any personal securities transactions. Access persons include
officers and directors of the Funds and Investment Manager and employees that
participate in, or obtain information regarding, the purchase or sale of
securities by the Funds or whose job relates to the making of any
recommendations with respect to such purchases or sales. All access persons must
report their personal securities transactions within ten days of the end of each
calendar quarter. Access persons will not be permitted to effect transactions in
a security if it: (a) is being considered for purchase or sale by one or more of
the Funds; (b) is being purchased or sold by one or more of the Funds; or (c) is
being offered in an initial public offering. In addition, portfolio managers are
prohibited from purchasing or selling a security within seven calendar days
before or after a Fund that he or she manages trades in that security. Any
material violation of the Code of Ethics is reported to the Board of the Funds.
The Board also reviews the administration of the Code of Ethics on an annual
basis.
DISTRIBUTOR
Security Distributors, Inc. (the "Distributor"), a Kansas corporation and
wholly-owned subsidiary of Security Benefit Group, Inc., serves as the principal
underwriter for shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Tax-Exempt Funds pursuant to Distribution Agreements
dated March 27, 1984, as amended, and October 7, 1983, respectively. The
Distributor also acts as principal underwriter for the following investment
companies: Security Equity Fund, Security Growth and Income Fund, Security Ultra
Fund, Variflex Variable Annuity Account, Variflex LS Variable Annuity, the
Parkstone Variable Annuity Account and Security Varilife Separate Account.
The Distributor receives a maximum commission on Class A Shares of 4.75%
and allows a maximum discount of 4.0% from the offering price to authorized
dealers on Fund shares sold. The discount is alike for all dealers, but the
Distributor may increase it for specific periods at its discretion. Salespersons
employed by dealers may also be licensed to sell insurance with Security Benefit
Life.
The Distributor received gross underwriting commissions on sales of Class A
shares and contingent deferred sales charges on redemptions for Class B shares
of $132,788 for Income Fund and $42,066 for Tax-Exempt Fund
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and retained net underwriting commissions of $39,452 for Income Fund and $13,059
for Tax-Exempt Fund for the fiscal year ended December 31, 1996. The Distributor
received gross underwriting commissions on sales of Class A shares of $80,868
and $244,043 for Income Fund and $20,691 and $64,008 for Tax-Exempt Fund and
retained net underwriting commissions of $9,910 and $48,307 for Income Fund and
$4,103 and $13,009 for Tax-Exempt Fund for the fiscal years ended December 31,
1995 and 1994, respectively.
The Distributor, on behalf of the Funds, may act as a broker in the
purchase and sale of securities not effected on a securities exchange, provided
that any such transactions and any commissions shall comply with requirements of
the Investment Company Act of 1940 and all rules and regulations of the
Securities and Exchange Commission. The Distributor has not acted as a broker.
Each Fund's Distribution Agreement is renewable annually either by the
Funds' Board of Directors or by a vote of a majority of the Fund's outstanding
securities, and, in either event, by a majority of the board who are not parties
to the agreement or interested persons of any such party. The agreements may be
terminated by either party upon 60 days' written notice.
ALLOCATION OF PORTFOLIO BROKERAGE
Transactions in portfolio securities shall be effected in such manner as
deemed to be in the best interest of each respective Fund. In reaching a
judgment relative to the qualifications of a broker or dealer to obtain the best
execution of a particular transaction, all relevant factors and circumstances
will be taken into account by the Investment Manager, including consideration of
the overall reasonableness of commissions paid to a broker, the firm's general
execution and operational capabilities, and its reliability and financial
condition. The Funds do not anticipate that they will incur a significant amount
of brokerage commissions because fixed income securities are generally traded on
a "net" basis--that is, in principal amount without the addition or deduction of
a stated brokerage commission, although the net price usually includes a profit
to the dealer. The Funds will deal directly with the selling or purchasing
principal without incurring charges for the services of a broker on its behalf
unless it is determined that a better price or execution may be obtained by
utilizing the services of a broker. The Funds also may purchase portfolio
securities in underwritings where the price includes a fixed underwriter's
concession or discount. Money market instruments may be purchased directly from
the issuer at no commission or discount.
Portfolio transactions that require a broker may be directed to brokers who
furnish investment information or research services to the Investment Manager.
Such investment information and research services include advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities and the availability of securities and purchasers or sellers of
securities, and furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and performance of
accounts. Such investment information and research services may be furnished by
brokers in many ways, including: (1) on-line data base systems, the equipment
for which is provided by the broker, that enable registrant to have real-time
access to market information, including quotations; (2) economic research
services, such as publications, chart services and advice from economists
concerning macroeconomic information; and (3) analytical investment information
concerning particular corporations. If a transaction is directed to a broker
supplying such information or services, the commission paid for such transaction
may be in excess of the commission another broker would have charged for
effecting that transaction, provided that the Investment Manager shall have
determined in good faith that the commission is reasonable in relation to the
value of the investment information or the research services provided, viewed in
terms of either that particular transaction or the overall responsibilities of
the Investment Manager with respect to all accounts as to which it exercises
investment discretion. The Investment Manager may use all, none, or some of such
information and services in providing investment advisory services to each of
the mutual funds under its management, including the Funds.
In addition, brokerage transactions may be placed with broker/dealers who
sell shares of the Funds managed by the Investment Manager who may or may not
also provide investment information and research services. The Investment
Manager may, consistent with the NASD Rules of Fair Practice, consider sales of
Fund shares in the selection of a broker/dealer.
Securities held by the Funds may also be held by other investment advisory
clients of the Investment Manager, including other investment companies. In
addition, the Investment Manager's parent company, Security Benefit Life
Insurance Company ("SBL"), may also hold some of the same securities as the
Funds. When selecting securities for purchase or sale for a Fund, the Investment
Manager may at the same time be purchasing or selling the same securities for
one or more of such other accounts. Subject to the Investment Manager's
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<PAGE>
obligation to seek best execution, such purchases or sales may be executed
simultaneously or "bunched." It is the policy of the Investment Manager not to
favor one account over the other. Any purchase or sale orders executed
simultaneously (which may also include orders from SBL) are allocated at the
average price and as nearly as practicable on a pro rata basis (transaction
costs will also generally be shared on a pro rata basis) in proportion to the
amounts desired to be purchased or sold by each account. In those instances
where it is not practical to allocate purchase or sale orders on a pro rata
basis, then the allocation will be made on a rotating or other equitable basis.
While it is conceivable that in certain instances this procedure could adversely
affect the price or number of shares involved in the Fund's transaction, it is
believed that the procedure generally contributes to better overall execution of
the Funds' portfolio transactions. The Board of Directors of the Funds has
adopted guidelines governing this procedure and will monitor the procedure to
determine that the guidelines are being followed and that the procedure
continues to be in the best interest of the Fund and its stockholders. With
respect to the allocation of initial public offerings ("IPOs"), the Investment
Manager may determine not to purchase such offerings for certain of its clients
(including investment company clients) due to the limited number of shares
typically available to the Investment Manager in an IPO. No brokerage
commissions were paid by the Funds for the years ended December 31, 1996, 1995
and 1994.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is determined as of the close of
regular trading hours on the New York Stock Exchange (normally 3:00 p.m. Central
time) on each day that the Exchange is open for trading, which is Monday through
Friday except for the following dates when the Exchange is closed in observance
of Federal holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
July Fourth, Labor Day, Thanksgiving Day and Christmas Day. The determination is
made by dividing the total value of the portfolio securities of each Fund, plus
any cash or other assets (including dividends accrued but not collected), less
all liabilities, by the number of shares outstanding of the Fund.
Securities listed or traded on a national securities exchange are valued at
the last sale price. If there are no sales on a particular day, then the
securities are valued at the last bid price. All other securities, held by
Corporate Bond, Limited Maturity Bond, U.S. Government and High Yield Funds, for
which market quotations are readily available, are valued on the basis of the
last current bid price. If there is no bid price, or if the bid price is deemed
to be unsatisfactory by the Board of Directors, then the securities shall be
valued in good faith by such method as the Board of Directors determines will
reflect fair market value. Valuations of the Funds' securities are supplied by a
pricing service approved by the Board of Directors.
U.S. Government Fund will generally value securities at market value, if
available. If market value is not available, the Fund will value securities,
other than securities with 60 days or less to maturity as discussed below, at
prices based on market quotations for securities of similar type, yield, quality
and duration.
Valuations furnished by the pricing service with respect to Tax-Exempt
Fund's municipal securities are based upon appraisals from recognized municipal
securities dealers derived from information concerning market transactions and
quotations. Securities for which market quotations are readily available are
valued at the last reported sale price, or, if no sales are reported on that
day, at the mean between the latest available bid and asked prices. Securities
for which market quotations are not readily available (which are expected to
constitute the majority of Tax-Exempt Fund's portfolio securities) are valued at
the best available current bid price by the pricing service, considering such
factors as yields or prices of municipal bonds of comparable quality, type of
issue, coupon, maturity and rating, indications as to value from dealers, and
general market conditions. The Fund's officers, under the general supervision of
the Board of Directors, will regularly review procedures used by, and valuations
provided by, the pricing service. Tax-Exempt Fund's taxable short-term
securities for which market quotations are readily available will be valued at
market value, which is the last reported sale price or, if no sales are reported
on that day, at the mean between the latest available bid and asked prices
except that securities having 60 days or less remaining to maturity may be
valued at their amortized cost as discussed below.
Cash Fund's securities are valued by the amortized cost valuation technique
which does not take into consideration unrealized gains or losses. The amortized
cost valuation technique involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price Cash Fund would receive if it sold the
instrument.
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During periods of declining interest rates, the daily yield on shares of
Cash Fund computed as described above may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by Cash Fund resulted
in lower aggregate portfolio value on a particular day, a prospective investor
in the Fund would be able to obtain a somewhat higher yield than would result
from investment in a fund utilizing solely market values and existing investors
in Cash Fund would receive less investment income. The converse would apply in a
period of rising interest rates.
The use of amortized cost and the maintenance of Cash Fund's per share net
asset value at $1.00 is based on its election to operate under the provisions of
Rule 2a-7 under the Investment Company Act of 1940. As a condition of operating
under that rule, the Fund must maintain a dollar-weighted average portfolio
maturity of 90 days or less, purchase only instruments having remaining
maturities of thirteen months or less, and invest only in securities which are
determined by the Board of Directors to present minimal credit risks and which
are of high quality as determined by any major rating service, or in the case of
any instrument not so rated, considered by the Board of Directors to be of
comparable quality.
The Board of Directors has established procedures designed to maintain Cash
Fund's price per share, as computed for the purpose of sales and redemptions, at
$1.00. These procedures include a review of the Fund's holdings by the Board of
Directors at such intervals as they deem appropriate to determine whether the
Fund's net asset value calculated by using available market quotations deviates
from $1.00 per share based on amortized cost. If any deviation exceeds 1/2 of
1%, the Board of Directors will promptly consider what action, if any, will be
initiated. In the event the Board of Directors determines that a deviation
exists which may result in material dilution or other unfair results to
investors or existing shareholders, they have agreed to take such corrective
action as they regard as necessary and appropriate, including the sale of Cash
Fund instruments prior to maturity to shorten average Fund maturity or
withholding dividends. Cash Fund will use its best efforts to maintain a
constant net asset value per share of $1.00. See "Security Cash Fund," page 12,
and "Dividends and Taxes," page 47. Since dividends from net investment income
will be accrued daily and paid monthly, the net asset value per share of Cash
Fund will ordinarily remain at $1.00, but the Fund's daily dividends will vary
in amount.
U.S. Government Fund and Tax-Exempt Fund may use the amortized cost
valuation technique utilized by Cash Fund for securities with maturities of 60
days or less. In addition, U.S. Government and Tax-Exempt Funds may use a
similar procedure for securities having 60 days or less remaining to maturity
with the value of the security on the 61st day being used rather than the cost.
The Funds will accept orders from dealers on each business day up to 4:30
p.m. (Central time).
HOW TO REDEEM SHARES
A stockholder may redeem shares at the net asset value next determined
after such shares are tendered for redemption. The amount received may be more
or less than the investor's cost, depending upon the market value of the
portfolio securities at the time of redemption.
Shares will be redeemed on request of the stockholder in proper order to
the Investment Manager, which serves as the Funds' transfer agent. A request is
made in proper order by submitting the following items to the Investment
Manager: (1) a written request for redemption signed by all registered owners
exactly as the account is registered, including fiduciary titles, if any, and
specifying the account number and the dollar amount or number of shares to be
redeemed; (2) a guarantee of all signatures on the written request or on the
share certificate or accompanying stock power; (3) any share certificates issued
for any of the shares to be redeemed; and (4) any additional documents which may
be required by the Investment Manager for redemption by corporations or other
organizations, executors, administrators, trustees, custodians or the like.
Transfers of share ownership are subject to the same requirements. A signature
guarantee is not required for redemptions of $10,000 or less, requested by and
payable to all stockholders of record for an account, to be sent to the address
of record. The signature guarantee must be provided by an eligible guarantor
institution, such as a bank, broker, credit union, national securities exchange
or savings association. The Investment Manager reserves the right to reject any
signature guarantee pursuant to its written procedures which may be revised in
the future. To avoid delay in redemption or transfer, stockholders having
questions should contact the Investment Manager.
The amount due on redemption, will be the net asset value of the shares
next computed after the redemption request in proper order is received by the
Investment Manager less any applicable deferred sales charge. In addition,
stockholders of Cash Fund will receive any undistributed dividends, including
any dividend declared on
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the day of the redemption. Payment of the redemption price will be made by check
(or by wire at the sole discretion of the Investment Manager if wire transfer is
requested, including name and address of the bank and the stockholder's account
number to which payment is to be wired) within seven days after receipt of the
redemption request in proper order. The check will be mailed to the
stockholder's registered address (or as otherwise directed). Remittance by wire
(to a commercial bank account in the same name(s) as the shares are registered)
or by express mail, if requested, will be at a charge of $15, which will be
deducted from the redemption proceeds.
Cash Fund offers redemption by check. If blank checks are requested on the
Check Writing Request form, the Fund will make a supply available. Checks for
the Cash Fund may be drawn payable to the order of any payee (not to cash) in
any amount of $100 or more. Checks may be cashed or deposited like any other
check drawn on a bank. When a check is presented to the Fund for payment, it
will redeem sufficient full and fractional shares to cover the check. Such
shares will be redeemed at the price next calculated following receipt of any
check which does not exceed the value of the account. The price of Cash Fund
shares may fluctuate from day-to-day and the price at the time of redemption, by
check or otherwise, may be less than the amount invested. Any check presented
for payment which is more than the value of the account will be returned without
payment, marked "Insufficient Funds." Each new stockholder will initially
receive twelve checks free of charge and such additional checks as may be
required. Since the amount available for withdrawal fluctuates daily, it is not
practical for a stockholder to attempt to withdraw the entire investment by
check. The Fund reserves the right to terminate this service at any time with
respect to existing as well as future stockholders. Redemption by check is not
available if any shares are held in certificate form or if shares being redeemed
have not been on the Fund's books for at least 15 days.
When investing in the Funds, stockholders are required to furnish their tax
identification number and to state whether or not they are subject to
withholding for prior underreporting, certified under penalties of perjury as
prescribed by the Internal Revenue Code. To the extent permitted by law, the
redemption proceeds of stockholders who fail to furnish this information will be
reduced by $50 to reimburse for the IRS penalty imposed for failure to report
the tax identification number on information reports.
Payment in cash of the amount due on redemption, less any applicable
deferred sales charge, for shares redeemed will be made within seven days after
tender, except that the Funds may suspend the right of redemption during any
period when trading on the New York Stock Exchange is restricted or such
Exchange is closed for other than weekends or holidays, or any emergency is
deemed to exist by the Securities and Exchange Commission. When a redemption
request is received, the redemption proceeds are deposited into a redemption
account established by the Distributor and the Distributor sends a check in the
amount of redemption proceeds to the stockholder. The Distributor earns interest
on the amounts maintained in the redemption account. Conversely, the Distributor
causes payments to be made to the Funds in the case of orders for purchase of
Fund shares before it actually receives federal funds.
In addition to the foregoing redemption procedure, the Funds repurchase
shares from broker/dealers at the price determined as of the close of business
on the day such offer is confirmed. Dealers may charge a commission on the
repurchase of shares.
The repurchase or redemption of shares held in a tax-qualified retirement
plan must be effected through the trustee of the plan and may result in adverse
tax consequences. (See "Retirement Plans," page 54.)
At various times the Funds may be requested to redeem shares for which they
have not yet received good payment. Accordingly, the Funds may delay the mailing
of a redemption check until such time as they have assured themselves that good
payment (e.g., cash or certified check on a U.S. bank) has been collected for
the purchase of such shares, which may take up to 15 days from the purchase
date.
Tax-Exempt Fund's Articles of Incorporation provide that, in order to
minimize expenses, the Fund may, pursuant to a resolution of the Board of
Directors, adopt a procedure whereby it would redeem stockholder accounts in
which there are fewer than 50 shares (or such lesser amount as the board
determines) after having given the stockholders at least 60 days' written notice
and an opportunity to increase the account to at least 50 shares. This procedure
can be implemented only after six months' prior notice to all stockholders that
the procedure will be put into effect. The Board of Directors has no present
plan to implement an involuntary redemption procedure.
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TELEPHONE REDEMPTIONS
Stockholders of the Funds may redeem uncertificated shares in amounts up to
$10,000 by telephone request, provided that the stockholder has completed the
Telephone Redemption section of the application or a Telephone Redemption form
which may be obtained from the Investment Manager. The proceeds of a telephone
redemption will be sent to the stockholder at his or her address as set forth in
the application or in a subsequent written authorization. Once authorization has
been received by the Investment Manager, a stockholder may redeem shares by
calling the Funds at (800) 888-2461, extension 3127, on weekdays (except
holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central time. Redemption
requests received by telephone after the close of the New York Stock Exchange
(normally 3:00 p.m. Central time) will be treated as if received on the next
business day. Telephone redemptions are not accepted for IRA and 403(b)(7)
accounts. A stockholder who authorizes telephone redemptions authorizes the
Investment Manager to act upon the instructions of any person identifying
themselves as the owner of the account or the owner's broker. The Investment
Manager has established procedures to confirm that instructions communicated by
telephone are genuine and will be liable for any losses due to fraudulent or
unauthorized instructions if it fails to comply with its procedures. The
Investment Manager's procedures require that any person requesting a redemption
by telephone provide the account registration and number, the owner's tax
identification number, and the dollar amount or number of shares to be redeemed,
and such instructions must be received on a recorded line. Neither the Fund, the
Investment Manager, nor the Distributor will be liable for any loss, liability,
cost or expense arising out of any redemption request provided that the
Investment Manager complied with its procedures. Thus, a stockholder who
authorizes telephone redemptions may bear the risk of loss from a fraudulent or
unauthorized request. The telephone redemption privilege may be changed or
discontinued at any time by the Investment Manager or the Funds.
During periods of severe market or economic conditions, telephone
redemptions may be difficult to implement and stockholders should make
redemptions by mail as described under "How to Redeem Shares," page 44.
HOW TO EXCHANGE SHARES
Pursuant to arrangements with the Distributor, stockholders of the Funds
may exchange their shares for shares of another of the Funds, or for shares of
the other mutual funds distributed by the Distributor, which currently include
Security Equity, Growth and Income, Global, Ultra, Asset Allocation, Social
Awareness, Emerging Markets Total Return, Global Asset Allocation and Global
High Yield Funds. Such transactions generally have the same tax consequences as
ordinary sales and purchases and are not tax-free exchanges.
Class A and Class B shares of the Funds may be exchanged for Class A and
Class B shares, respectively, of another of the funds distributed by the
Distributor or for shares of Cash Fund, which offers a single class of shares.
Any applicable contingent deferred sales charge will be calculated from the date
of the initial purchase without regard to the time shares were held in Cash
Fund.
Because Cash Fund does not impose a sales charge in connection with sales
of its shares, any exchange of Cash Fund shares acquired through direct purchase
or reinvestment of dividends will be based upon the respective net asset values
of the shares involved next determined after the exchange is accepted, and a
sales charge will be imposed equal to the sales charge that would be applicable
if the stockholder were purchasing shares of the other Fund involved for cash.
The amount of such sales charge will be paid by Cash Fund on behalf of the
exchanging stockholder directly to the Distributor and the net asset value of
the shares being exchanged will be reduced by a like amount.
Stockholders making such exchanges must provide the Investment Manager with
sufficient information to permit verification of their prior ownership of shares
of one of the other Security Funds. Shares of Cash Fund begin earning dividends
on the day after the date an exchange into such shares is effected. Any such
exchange is subject to the minimum investment and eligibility requirements of
each Fund. No service fee is presently imposed on such an exchange.
Exchanges may be accomplished by submitting a written request to the
Investment Manager, 700 Harrison Street, Topeka, Kansas 66636-0001.
Broker/dealers who process exchange orders on behalf of their customers may
charge a fee for their services. Such fee would be in addition to any of the
sales or other charges referred to above but may be avoided by making exchange
requests directly to the Investment Manager. Due to the high cost of exchange
activity and the maintenance of accounts having a net value of less than $100,
Cash Fund reserves
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the right to totally convert the account if at any time an exchange request
results in an account being lowered below the $100 minimum.
An exchange of shares, as described above, may result in the realization of
a capital gain or loss for federal income tax purposes, depending on the cost or
other value of the shares exchanged. No representation is made as to whether
gain or loss would result from any particular exchange or as to the manner of
determining the amount of gain or loss. (See "Dividends and Taxes," page 47.)
Before effecting any exchange described herein, the investor may wish to seek
the advice of a financial or tax adviser.
Exchanges of shares of the Funds may be made only in jurisdictions where
shares of the fund being acquired may lawfully be sold. More complete
information about the other Security Funds, including charges and expenses, are
contained in the current prospectus describing each Fund. Stockholders are
advised to obtain and review carefully, the applicable prospectus prior to
effecting any exchange. A copy of such prospectus will be given any requesting
stockholder by the Distributor.
The exchange privilege may be changed or discontinued any time at the
discretion of the management of the Funds upon 60 days' notice to stockholders.
It is contemplated, however, that this privilege will be extended in the absence
of objection by regulatory authorities and provided that shares of the various
funds are available and may be lawfully sold in the jurisdiction in which the
stockholder resides.
EXCHANGE BY TELEPHONE
To exchange shares by telephone, a stockholder must have completed either
the Telephone Exchange section of the application or a Telephone Transfer
Authorization form which may be obtained from the Investment Manager.
Authorization must be on file with the Investment Manager before exchanges may
be made by telephone. Once authorization has been received by the Investment
Manager, a stockholder may exchange shares by telephone by calling the Funds at
(800) 888-2461, extension 3127, on weekdays (except holidays) between the hours
of 7:00 a.m. and 6:00 p.m. Central time. Exchange requests received by telephone
after the close of the New York Stock Exchange (normally 3:00 p.m. Central time)
will be treated as if received on the next business day. Shares which are held
in certificate form may not be exchanged by telephone. The telephone exchange
privilege is only permitted between accounts with identical registration. The
Investment Manager has established procedures to confirm that instructions
communicated by telephone are genuine and will be liable for any losses due to
fraudulent or unauthorized instructions, if it fails to comply with its
procedures. The Investment Manager's procedures require that any person
requesting an exchange by telephone provide the account registration and number,
the tax identification number, the dollar amount or number of shares to be
exchanged, and the names of the Security Funds from which and into which the
exchange is to be made, and such instructions must be received on a recorded
line. Neither the Funds, the Investment Manager, nor the Distributor will be
liable for any loss, liability, cost or expense arising out of any request,
including any fraudulent request provided the Investment Manager complied with
its procedures. Thus, a stockholder who authorizes telephone exchanges may bear
the risk of loss from a fraudulent or unauthorized request. This telephone
exchange privilege may be changed or discontinued at any time at the discretion
of the management of the Funds. In particular, the Funds may set limits on the
amount and frequency of such exchanges, in general or as to any individual who
abuses such privilege.
DIVIDENDS AND TAXES
Each Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify as a regulated investment company, each Fund must,
among other things: (i) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to certain securities
loans, and gains from the sale or other disposition of stock, securities or
foreign currencies, or other income derived with respect to its business of
investing in such stock, securities, or currencies ("Qualifying Income Test");
(ii) derive in each taxable year less than 30% of its gross income from the sale
or other disposition of certain assets held less than three months (namely (a)
stock or securities, (b) options, futures and forward contracts (other than
those on foreign currencies), and (c) foreign currencies (including options,
futures, and forward contracts on such currencies) not directly related to a
Fund's principal business of investing in stocks or securities (or options and
futures with respect to stocks and securities)); (iii) diversify its holdings so
that, at the end of each quarter of the taxable year, (a) at least 50% of the
market value of the Fund's assets is represented by cash, cash items, U.S.
Government securities, the securities
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of other regulated investment companies, and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (b) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies), or of two or more issuers which the Fund controls (as
that term is defined in the relevant provisions of the Code) and which are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses; and (iv) distribute at least 90% of the sum of its
investment company taxable income (which includes, among other items, dividends,
interest, and net short-term capital gains in excess of any net long-term
capital losses) and its net tax-exempt interest each taxable year. The Treasury
Department is authorized to promulgate regulations under which foreign currency
gains would constitute qualifying income for purposes of the Qualifying Income
Test only if such gains are directly related to investing in securities (or
options and futures with respect to securities). To date, no such regulations
have been issued.
A Fund qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. Each
Fund intends to distribute to its stockholders, at least annually, substantially
all of its investment company taxable income and any net capital gains.
Generally, regulated investment companies, like the Funds, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Fund intends to
make its distributions in accordance with the calendar year distribution
requirement. A distribution, including an "exempt-interest dividend," will be
treated as paid on December 31 of the calendar year if it is declared by a Fund
in October, November or December of that year to shareholders of record on a
date in such a month and paid by the Fund during January of the following
calendar year. Such distributions are taxable to shareholders in the calendar
year in which the distributions are declared, rather than the calendar year in
which the distributions are received.
If, as a result of exchange controls or other foreign laws or restrictions
regarding repatriation of capital, a Fund were unable to distribute an amount
equal to substantially all of its investment company taxable income (as
determined for U.S. tax purposes) within applicable time periods, the Fund would
not qualify for the favorable federal income tax treatment afforded regulated
investment companies, or, even if it did so qualify, it might become liable for
federal taxes on undistributed income. In addition, the ability of a Fund to
obtain timely and accurate information relating to its investments is a
significant factor in complying with the requirements applicable to regulated
investment companies in making tax-related computations. Thus, if a Fund were
unable to obtain accurate information on a timely basis, it might be unable to
qualify as a regulated investment company, or its tax computations might be
subject to revisions (which could result in the imposition of taxes, interest
and penalties).
It is the policy of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Tax-Exempt Funds to pay dividends from net investment income
monthly. It is the policy of the Funds to make distributions of realized capital
gains (if any) in excess of any capital losses and capital loss carryovers at
least once a year. Because Class A shares of the Funds bear most of the costs of
distribution of such shares through payment of a front-end sales charge, while
Class B shares of the Funds bear such costs through a higher distribution fee,
expenses attributable to Class B shares, generally will be higher and as a
result, income distributions paid by the Funds with respect to Class B shares
generally will be lower than those paid with respect to Class A shares. All
dividends and distributions are automatically reinvested on the payable date in
shares of the Fund at net asset value, as of the record date (reduced by an
amount equal to the amount of the dividend or distribution), unless the
Investment Manager is previously notified in writing by the stockholder that
such dividends or distributions are to be received in cash. A stockholder may
request that such dividends or distributions be directly deposited to the
stockholder's bank account. A stockholder who elected not to reinvest dividends
or distributions paid with respect to Class A shares may, at any time within
thirty days after the payment date, reinvest the dividend check without
imposition of a sales charge.
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Cash Fund's policy is to declare daily dividends of all of its net
investment income each day the Fund is open for business, increased or decreased
by any realized capital gains or losses. Such dividends are automatically
credited to stockholder accounts. Unless stockholders elect to receive cash,
they will receive such dividends in additional shares on the first business day
of each month at the net asset value on that date. If cash is desired, investors
may indicate so in the appropriate section of the application and checks will be
mailed within five business days after the beginning of the month. The amount of
dividend may fluctuate from day to day. If on any day net realized or unrealized
losses on portfolio securities exceed Cash Fund's income for that day and
results in a decline of net asset value per share below $1.00, the dividend for
that day will be omitted until the net asset value per share subsequently
returns to $1.00 per share.
The Funds will not pay dividends or distributions of less than $25 in cash
but will automatically reinvest them. Distributions of net investment income and
any short-term capital gains by Income Fund or Cash Fund are taxable as ordinary
income whether received in cash or reinvested in additional shares. To the
extent that Tax-Exempt Fund's dividends are derived from interest on its
temporary taxable investments or from an excess of net short-term capital gain
over net long-term capital loss, its dividends are taxable as ordinary income
whether received in cash or reinvested in additional shares. Such dividends do
not qualify for the dividends-received deduction for corporations.
Stockholders will report as long-term capital gains income any realized net
long-term capital gains in excess of any capital loss carryover which is
distributed to them, and designated by the Fund as a capital gain dividend
whether received in cash or reinvested in additional shares, and regardless of
the period of time such shares have been owned by the stockholder. Because Cash
Fund normally will not invest in securities having a maturity of more than one
year, it should not realize any long-term capital gains or losses. Advice as to
the tax status of each year's dividends and distributions will be mailed
annually.
Tax-Exempt Fund intends to qualify to pay "exempt-interest dividends" to
its stockholders. The Fund will be so qualified if, at the close of each quarter
of its taxable year, at least 50% of the value of its total assets consists of
securities on which the interest payments are exempt from federal tax. To the
extent that Tax-Exempt Fund's dividends distributed to stockholders are derived
from earnings on interest income exempt from federal tax and are designated as
"exempt-interest dividends" by the Fund, they will be excludable from a
stockholder's gross income for federal income tax purposes. Tax-Exempt Fund will
inform stockholders annually as to the portion of that year's distributions from
the Fund which constituted "exempt-interest dividends."
To the extent that Tax-Exempt Fund's interest income is attributable to
private activity bonds, dividends allocable to such income, while exempt from
the regular federal income tax, may constitute an item of tax preference for
purposes of the alternative minimum tax. In addition, for corporate stockholders
of Tax-Exempt Fund, exempt interest may comprise part or all of an adjustment to
alternative minimum taxable income.
Stockholders of the Funds who redeem their shares generally will realize
gain or loss upon the sale or redemption (including the exchange of shares for
shares of another fund) which will be capital gain or loss if the shares are
capital assets in the stockholder's hands, and will be long-term capital gain or
loss if the shares have been held for more than one year. Investors should be
aware that any loss realized upon the sale or redemption of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
distribution of long-term capital gain to the stockholder with respect to such
shares. In addition, any loss realized on a sale or exchange of shares will be
disallowed to the extent the shares disposed of are replaced within a period of
61 days, beginning 30 days before and ending 30 days after the date the shares
are disposed of, such as pursuant to the reinvestment of dividends. In such
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Under certain circumstances, the sales charge incurred in acquiring Class A
shares of a Fund may not be taken into account in determining the gain or loss
on the disposition of those shares. This rule applies in circumstances when
shares of the Fund are exchanged within 90 days after the date they were
purchased and new shares in a regulated investment company are acquired without
a sales charge or at a reduced sales charge. In that case, the gain or loss
recognized on the exchange will be determined by excluding from the tax basis of
the shares exchanged all or a portion of the sales charge incurred in acquiring
those shares. This exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired shares is reduced as a result of
having incurred the sales charge initially. Instead, the portion of the sales
charge affected by this rule will be treated as an amount paid for the new
shares.
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Up to 85% of an individual's Social Security benefits and certain railroad
retirement benefits may be subject to federal income tax. Along with other
factors, total tax-exempt income, including any exempt-interest dividends
received from Tax-Exempt Fund, is used to calculate the portion of Social
Security benefits that is taxed.
Under the Internal Revenue Code, a stockholder may not deduct all or a
portion of interest on indebtedness incurred or continued to purchase or carry
shares of an investment company paying exempt-interest dividends. In addition,
under rules issued by the Internal Revenue Service for determining when borrowed
funds are considered used for the purposes of purchasing or carrying particular
assets, the purchase of shares may be considered to have been made with borrowed
funds even though the borrowed funds are not directly traceable to the purchase
of shares.
A deductible "environmental tax" of 0.12% is imposed on a corporation's
modified alternative minimum taxable income in excess of $2 million. The
environmental tax will be imposed even if the corporation is not required to pay
an alternative minimum tax because the corporation's regular income tax
liability exceeds its minimum tax liability. To the extent that exempt-interest
dividends paid by Tax-Exempt Fund are included in alternative minimum taxable
income, corporate stockholders may be subject to the environmental tax.
Opinions relating to the validity of municipal securities and the exemption
of interest thereon from federal income tax are rendered by bond counsel to the
issuer. Neither the Investment Manager nor Tax-Exempt Fund's counsel makes any
review of proceedings relating to the issuance of municipal securities or the
bases of such opinions.
The Funds are required by law to withhold 31% of taxable dividends and
distributions to stockholders who do not furnish their correct taxpayer
identification numbers, or are otherwise subject to the backup withholding
provisions of the Internal Revenue Code.
Each of Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government
Fund and High Yield Fund (the Series of Income Fund) will be treated separately
in determining the amounts of income and capital gains distributions. For this
purpose, each Fund will reflect only the income and gains, net of losses of that
Fund.
A purchase of shares shortly before payment of a dividend or distribution
would be disadvantageous because the dividend or distribution to the purchaser
would have the effect of reducing the per share net asset value of his or her
shares by the amount of the dividends or distributions. In addition all or a
portion of such dividends or distributions, although in effect a return of
capital, are subject to taxes, which may be at ordinary income tax rates.
OPTIONS, FUTURES AND FORWARD CONTRACTS AND SWAP AGREEMENTS. Certain
options, futures contracts, and forward contracts in which a Fund may invest may
be "Section 1256 contracts." Gains or losses on Section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses;
however, foreign currency gains or losses arising from certain Section 1256
contracts may be treated as ordinary income or loss. Also, Section 1256
contracts held by a Fund at the end of each taxable year (and at certain other
times as prescribed pursuant to the Code) are "marked to market" with the result
that unrealized gains or losses are treated as though they were realized.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of transactions in options, futures, forward
contracts, swap agreements and other financial contracts to a Fund are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by a Fund which is taxed as ordinary income when distributed to
shareholders.
A Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
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Because only a few regulations regarding the treatment of swap agreements,
and related caps, floors and collars, have been implemented, the tax
consequences of such transactions are not entirely clear. The Funds intend to
account for such transactions in a manner deemed by them to be appropriate, but
the Internal Revenue Service might not necessarily accept such treatment. If it
did not, the status of a Fund as a regulated investment company might be
affected.
The requirements applicable to a Fund's qualification as a regulated
investment company may limit the extent to which a Fund will be able to engage
in transactions in options, futures contracts, forward contracts, swap
agreements and other financial contracts.
FOREIGN TAXATION. Income received by a Fund from sources within a foreign
country may be subject to withholding and other taxes imposed by that country.
Tax conventions between certain countries and the U.S. may reduce or eliminate
such taxes.
ORIGINAL ISSUE DISCOUNT. Debt securities purchased by a Fund (such as zero
coupon bonds) may be treated for U.S. federal income tax purposes as having
original issue discount. Original issue discount is treated as interest for
federal income tax purposes and can generally be defined as the excess of the
stated redemption price at maturity over the issue price. Original issue
discount, whether or not cash payments actually are received by a Fund, is
treated for federal income tax purposes as income earned by the Fund, and
therefore is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount included in the income of the Fund each
year is determined on the basis of a constant yield to maturity which takes into
account the compounding of accrued interest.
In addition, debt securities may be purchased by a Fund at a discount which
exceeds the original issue discount remaining on the securities, if any, at the
time the Fund purchased the securities. This additional discount represents
market discount for income tax purposes. Treatment of market discount varies
depending upon the maturity of the debt security. Generally, in the case of any
debt security having a fixed maturity date of more than one year from the date
of issue and having market discount, the gain realized on disposition will be
treated as ordinary income to the extent it does not exceed the accrued market
discount on the security (unless the Fund elects for all its debt securities
having a fixed maturity date of more than one year from the date of issue to
include market discount in income in tax years to which it is attributable).
Generally, market discount accrues on a daily basis. For any debt security
having a fixed maturity date of not more than one year from the date of issue,
special rules apply which may require in some circumstances the ratable
inclusion of income attributable to discount at which the bond was acquired as
calculated under the Code. A Fund may be required to capitalize, rather than
deduct currently, part or all of any net direct interest expense on indebtedness
incurred or continued to purchase or carry any debt security having market
discount (unless the Fund makes the election to include market discount
currently).
OTHER TAXES. The foregoing discussion is general in nature and is not
intended to provide an exhaustive presentation of the tax consequences of
investing in a Fund. Distributions may also be subject to additional state,
local and foreign taxes, depending on each shareholder's particular situation.
Depending upon the nature and extent of a Fund's contacts with a state or local
jurisdiction, the Fund may be subject to the tax laws of such jurisdiction if it
is regarded under applicable law as doing business in, or as having income
derived from, the jurisdiction. Persons who may be "substantial users" (or
"related persons" of substantial users) of facilities financed by private
activity bonds should consult their tax adviser before purchasing Tax-Exempt
Fund shares. (See "Municipal Securities," page 9.) Shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in a Fund.
ORGANIZATION
The Articles of Incorporation of Income and Tax-Exempt Funds provide for
the issuance of shares of common stock in one or more classes or series and the
Articles of Cash Fund provide for the issuance of stock in one or more series.
Income Fund has authorized the issuance of an indefinite number of shares
of capital stock of $1.00 par value and currently issues its shares in seven
series, Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government Fund,
High Yield Fund, MFR Emerging Markets Total Return Fund, MFR Global Asset
Allocation Fund and MFR Global High Yield Fund (formerly Global Aggressive Bond
Fund). The shares of each Series of Income Fund represent a pro rata beneficial
interest in that Series' net assets and in the earnings and profits or losses
derived from the investment of such assets. Tax-Exempt and Cash Funds have not
issued shares in any
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additional series at the present time. Tax-Exempt and Cash Funds have authorized
the issuance of an indefinite number of shares of capital stock of $0.10 par
value.
Each of Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield
and Tax-Exempt Funds currently issues two classes of shares which participate
proportionately based on their relative net asset values in dividends and
distributions and have equal voting, liquidation and other rights except that
(i) expenses related to the distribution of each class of shares or other
expenses that the Board of Directors may designate as class expenses from time
to time, are borne solely by each class; (ii) each class of shares has exclusive
voting rights with respect to any Distribution Plan adopted for that class;
(iii) each class has different exchange privileges; and (iv) each class has a
different designation. When issued and paid for, the shares of Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield, Tax-Exempt and Cash Funds
will be fully paid and nonassessable by the Funds. Shares may be exchanged as
described above under "Exchange Privilege," but will have no other preference,
conversion, exchange or preemptive rights. Shares are transferable, redeemable
and assignable and have cumulative voting privileges for the election of
directors.
On certain matters, such as the election of directors, all shares of the
Series of Income Fund vote together with each share having one vote. On other
matters affecting a particular Series, such as the investment advisory contract
or the fundamental policies, only shares of that Series are entitled to vote,
and a majority vote of the shares of that Series is required for approval of the
proposal.
The Funds do not generally hold annual meetings of stockholders and will do
so only when required by law. Stockholders may remove directors from office by
vote cast in person or by proxy at a meeting of stockholders. Such a meeting
will be called at the written request of 10% of a Fund's outstanding shares.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64106 acts as the
custodian for the portfolio securities of Corporate Bond Fund, Limited Maturity
Bond Fund, U.S. Government Fund, High Yield, Tax-Exempt Fund and Cash Fund.
Security Management Company, LLC acts as the Funds' transfer and dividend-paying
agent.
INDEPENDENT AUDITORS
The firm of Ernst & Young LLP, One Kansas City Place, 1200 Main Street,
Kansas City, Missouri, has been selected by a majority of the independent
directors of each Fund to serve as the independent auditors of the Funds, and as
such, the firm will perform the annual audit of each Fund's financial
statements.
PERFORMANCE INFORMATION
The Funds may, from time to time, include performance information in
advertisements, sales literature or reports to stockholders or prospective
investors. Performance information in advertisements or sales literature may be
expressed as yield for each of the Funds, effective yield for Cash Fund, taxable
equivalent yield for Tax-Exempt Fund and average annual total return and
aggregate total return for Tax-Exempt and Income Funds.
For Cash Fund, the current yield will be based upon the seven calendar days
ending on the date of calculation ("the base period"). The total net investment
income earned, exclusive of realized capital gains and losses or unrealized
appreciation and depreciation, during the base period, on a hypothetical
pre-existing account having a balance of one share will be divided by the value
of the account at the beginning of that period. The resulting figure ("the base
period return") will then be multiplied by 365/7 to obtain the current yield.
Cash Fund's current yield for the seven-day period ended December 31, 1996 was
4.80%.
Cash Fund's effective (or compound) yield for the same period was 4.92%.
The effective yield reflects the compounding of the current yield by reinvesting
all dividends and will be computed by compounding the base period return by
adding 1 to the base period return, raising the sum to a power equal to 365
divided by 7, and subtracting 1 from the result. The yield of the Fund may be
obtained by calling the Fund.
Investors should recognize that investment in Cash Fund is not guaranteed
or insured by any state, federal or government agency or by any other person.
With respect to Income Fund and Tax-Exempt Fund, quotations of yield will
be based on the investment income per share earned during a particular 30-day
period, less expenses per share accrued during the period ("net investment
income") and will be computed by dividing net investment income by the maximum
offering price per share on the last day of the period, according to the
following formula:
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YIELD = 2[(A-B + 1)6 - 1]
---
cd
where A = dividends and interest earned during the period, B = expenses accrued
for the period (net of any reimbursements), C = the average daily number of
shares outstanding during the period that were entitled to receive dividends,
and D = the maximum offering price per share on the last day of the period.
Tax-Exempt Fund's tax-equivalent yield, like yield, is based on a 30-day
period and is computed by dividing that portion of the Fund's yield (computed as
described above) which is tax-exempt by one minus a stated income tax rate and
adding the resulting figure to that portion of the Fund's yield, if any, that is
not tax-exempt.
For the 30-day period ended December 31, 1996, the yield for the Class A
shares of the following Funds was 6.30% for Corporate Bond Fund, 5.56% for
Limited Maturity Bond Fund, 6.05% for the U.S. Government Fund, 7.10% for High
Yield Fund, and 4.74% for Tax-Exempt Fund. For the same period, the tax
equivalent yield for the Class A shares of Tax-Exempt Fund assuming a 15% income
tax rate and a 28% income tax rate, respectively, was 5.58% and 6.58%.
For the 30-day period ended December 31, 1996, the yield for the Class B
shares of the following Funds was 5.59% for the Corporate Bond Fund, 5.55% for
Limited Maturity Bond Fund, 4.96% for the U.S. Government Fund, 6.68% for High
Yield Fund, and 3.19% for Tax-Exempt Fund. For the same period, the tax
equivalent yield for the Class B shares of Tax-Exempt Fund assuming a 15% income
tax rate and a 28% income tax rate, respectively, was 3.75% and 4.43%.
There is no assurance that a yield quoted will remain in effect for any
period of time. Inasmuch as certain estimates must be made in computing average
daily yield, actual yields may vary and will depend upon such factors as the
type of instruments in the Fund's portfolio, the portfolio quality and average
maturity of such instruments, changes in interest rates and the actual Fund
expenses. Yield computations will reflect the expense limitations described in
this Prospectus under "Investment Manager."
Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in Income
Fund or Tax-Exempt Fund over periods of 1, 5 and 10 years (up to the life of the
Fund), calculated pursuant to the following formula:
P(1+T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All average
annual total return figures will reflect the deduction of the maximum initial
sales load in the case of quotations of performance of Class A shares or the
applicable contingent deferred sales charge in the case of quotations of
performance of Class B shares and a proportional share of Fund expenses on an
annual basis, and assume that all dividends and distributions are reinvested
when paid.
For the 1-, 5- and 10-year periods ended December 31, 1996, the average
annual total return for Class A shares of the Corporate Bond Fund was -5.69%,
4.96% and 6.74%, respectively. For the 1-year period ended December 31, 1996,
the average annual total return for Class B shares of Corporate Bond Fund was
- -6.29%. For the period October 19, 1993 (date of inception) to December 31,
1996, the average annual total return for Class B shares of the Corporate Bond
Fund was -0.28%.
For the 1-, 5- and 10-year periods ended December 31, 1996, the average
annual total return for Class A shares of the U.S. Government Fund was -3.59%,
5.19% and 7.10%, respectively. For the 1-year period ended December 31, 1996,
the average annual total return for Class B shares of U.S. Government Fund was
- -4.97%. For the period October 19, 1993 (date of inception) to December 31,
1996, the average annual total return for Class B shares of the U.S. Government
Fund was 1.95%.
For the 1-, 5- and 10-year periods ended December 31, 1996, the average
annual total return for Class A shares of Tax-Exempt Fund was -2.40%, 4.50% and
5.33%, respectively. For the 1-year period ended December 31, 1996, the average
annual total return for Class B shares of Tax-Exempt Fund was -3.76%. For the
period October 19, 1993 (date of inception) to December 31, 1996, the average
annual total return for Class B shares of Tax-Exempt Fund was 0.27%.
For the 1-year period ended December 31, 1996, the average annual total
return for Class A and B shares of Limited Maturity Bond Fund was -2.74% and
- -3.95%, respectively. For the period January 17, 1995 (date of inception) to
December 31, 1996, the average annual total return for Class A and B shares of
Limited Maturity Bond Fund was 4.94% and 4.68%, respectively.
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For the period August 5, 1996 (date of inception) to December 31, 1996, the
average annual total return for Class A and B shares of High Yield Fund was .23%
and -.24%, respectively.
The aggregate total return for Income and Tax-Exempt Funds is calculated
for any specified period of time pursuant to the following formula:
P(1+T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the total return, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All aggregate total return figures will assume that
all dividends and distributions are reinvested when paid. The Funds may, from
time to time, include quotations of total return that do not reflect deduction
of the sales load which, if reflected, would reduce the total return data
quoted.
The aggregate total return on an investment made in Class A shares of the
Corporate Bond Fund, the U.S. Government Fund and Tax-Exempt Fund calculated as
described above for the period from December 31, 1986, for the Corporate Bond
Fund, U.S. Government Fund and Tax-Exempt Fund, through December 31, 1996 was
92.0%, 98.5% and 68.0%, respectively. These figures reflect deduction of the
maximum initial sales load.
The aggregate total return on an investment made in Class B shares of the
Corporate Bond Fund, the U.S. Government Fund and Tax-Exempt Fund calculated as
described above for the period October 19, 1993 through December 31, 1996 was
- -0.9%, 6.4% and 0.9%, respectively. These figures reflect deduction of the
maximum contingent deferred sales charge.
The aggregate total return on an investment made in Class A and B shares of
the Limited Maturity Bond Fund for the period January 17, 1995 through December
31, 1996 was 9.9% and 9.3%, respectively. These figures reflect deduction of the
maximum initial sales load and deduction of the maximum contingent deferred
sales charge.
The aggregate total return on an investment made in Class A and B shares of
the High Yield Fund for the period August 5, 1996 (date of inception) through
December 31, 1996, was .10% and -.10%, respectively. These figures reflect
deduction of the maximum initial sales load and deduction of the maximum
contingent deferred sales charge.
In addition, quotations of aggregate total return will also be calculated
for several consecutive one-year periods expressing the total return as a
percentage increase or decrease in the value of the investment for each year
relative to the ending value for the previous year.
Quotations of yield, tax-equivalent yield, average annual total return and
aggregate total return will reflect only the performance of a hypothetical
investment during the particular time period shown. Such quotations will vary
based on changes in market conditions and the level of the Fund's expenses, and
no reported performance figure should be considered an indication of performance
which may be expected in the future.
In connection with communicating its yield, tax-equivalent yield, average
annual total return or aggregate total return to current or prospective
stockholders, each Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to other unmanaged
indexes which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. Each Fund will include
performance data for both Class A and Class B shares of the Fund in any
advertisement or report including performance data of the Fund. Such mutual fund
rating services include the following: Lipper Analytical Services; Morningstar,
Inc.; Investment Company Data; Schabacker Investment Management; Wiesenberger
Investment Companies Service; Computer Directions Advisory (CDA); and Johnson
Charts.
RETIREMENT PLANS
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and Cash
Funds offer tax-qualified retirement plans for individuals (Individual
Retirement Accounts, known as IRAs), several prototype retirement plans for the
self-employed (Keogh plans), pension and profit-sharing plans for corporations,
and custodial account plans for employees of public school systems and
organizations meeting the requirements of Section 501(c)(3) of the Internal
Revenue Code. Actual documents and detailed materials about the plans will be
provided upon request to the Distributor.
Purchases of Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield and Cash Fund shares under any of these plans are made at the public
offering price next determined after contributions are received by the
Distributor. Shares owned under any of the plans have full dividend, voting and
redemption privileges.
54
<PAGE>
Depending upon the terms of the particular plan, retirement benefits may be paid
in a lump sum or in installment payments over a specified period. There are
possible penalties for premature distributions from such plans.
Security Management Company, LLC is available to act as custodian for the
plans on a fee basis. For IRAs, SIMPLE IRAs, Section 403(b) Retirement Plans,
and Simplified Employee Pension Plans (SEPPs), service fees for such custodial
services currently are: (1) $10 for annual maintenance of the account, and (2)
benefit distribution fee of $5 per distribution. Service fees for other types of
plans will vary. These fees will be deducted from the plan assets. Optional
supplemental services are available from Security Benefit Life Insurance Company
for additional charges.
Retirement investment programs involve commitments covering future years.
It is important that the investment objective and structure of Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield and Cash Funds be considered
by the investors for such plans. Investments in insurance and annuity contracts
also may be purchased in addition to shares of the Funds.
A brief description of the available tax-qualified retirement plans is
provided below. However, the tax rules applicable to such qualified plans vary
according to the type of plan and the terms and conditions of the plan itself.
Therefore, no attempt is made to provide more than general information about the
various types of qualified plans. Because Tax-Exempt Fund's investment objective
is to obtain a high level of interest income exempt from federal taxes,
Tax-Exempt Fund is not an appropriate investment for retirement plans.
Investors are urged to consult their own attorneys or tax advisers when
considering the establishment and maintenance of any such plans.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
Individual Retirement Account Custodial Agreements are available to provide
investment in shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield or Cash Fund, or in other Funds in the Security Group. An individual
may initiate an IRA through the Distributor by executing the custodial agreement
and making a minimum initial investment of at least $100. A $10 annual fee is
charged for maintaining the account.
An individual may make a contribution to an IRA each year of up to the
lesser of $2,000 or 100% of earned income under current tax law. Spousal IRAs
allow an individual and his or her spouse to contribute up to $2,000 to their
respective IRAs so long as a joint tax return is filed and joint income is
$4,000 or more. The maximum amount the higher compensated spouse may contribute
for the year is the lesser of $2,000 or 100% of that spouse's compensation. The
maximum the lower compensated spouse may contribute is the lesser of (i) $2,000
or (ii) 100% of that spouse's compensation plus the amount by which the higher
compensated spouse's compensation exceeds the amount the higher compensated
spouse contributes to his or her IRA.
Deductions for IRA contributions are limited for taxpayers who are covered
by an employer-sponsored retirement plan. However, these limitations do not
apply to a single taxpayer with adjusted gross income of $25,000 or less or
married taxpayers with adjusted gross income of $40,000 or less (if they file a
joint tax return). Taxpayers with adjusted gross income less than $10,000 in
excess of these amounts may deduct a portion of their IRA contributions. The
nondeductible portion is calculated by reference to the amount of the taxpayer's
income above $25,000 (single) or $40,000 (married) as a percentage of $10,000.
Contributions must be made in cash no later than April 15 following the
close of the tax year. No annual contribution is permitted for the year in which
the investor reaches age 70 1/2 or any year thereafter.
In addition to annual contributions, total distributions and certain
partial distributions from certain employer-sponsored retirement plans may be
eligible to be reinvested into an IRA if the reinvestment is made within 60 days
of receipt of the distribution by the taxpayer. Such rollover contributions are
not subject to the limitations on annual IRA contributions described above.
SIMPLE IRAS
The Small Business Job Protection Act of 1996 created a new retirement
plan, the Savings Incentive Match Plan for Employees of Small Employers (SIMPLE
Plans). SIMPLE Plan participants must establish a SIMPLE IRA into which plan
contributions will be deposited.
The Investment Manager makes available SIMPLE IRAs to provide investment in
shares of the Funds. Contributions to a SIMPLE IRA may be either salary deferral
contributions or employer contributions. Contributions must be made in cash and
cannot exceed the maximum amount allowed under the Internal Revenue
55
<PAGE>
Code. On a pre-tax basis, up to $6,000 of compensation (through salary
deferrals) may be contributed to a SIMPLE IRA. In addition, employers are
required to make either (1) a dollar-for-dollar matching contribution or (2) a
nonelective contribution to each participant's account each year. In general,
matching contributions must equal up to 3% of compensation, but under certain
circumstances, employers may make lower matching contributions. Instead of the
match, employers may make a nonelective contribution equal to 2% of compensation
(compensation for purposes of any nonelective contribution is limited to
$160,000, as indexed).
Distributions from a SIMPLE IRA are (1) taxed as ordinary income; (2)
includable in gross income; and (3) subject to applicable state tax laws.
Distributions prior to age 59 1/2 may be subject to a 10% penalty tax which
increases to 25% for distributions made before a participant has participated in
the SIMPLE Plan for at least two years. An annual fee of $10 is charged for
maintaining the SIMPLE IRA.
PENSION AND PROFIT-SHARING PLANS
Prototype corporate pension or profit-sharing prototype plans meeting the
requirements of Internal Revenue Code Section 401(a) are available. Information
concerning these plans may be obtained from Security Distributors, Inc.
403(B) RETIREMENT PLANS
Employees of public school systems and tax-exempt organizations meeting the
requirements of Internal Revenue Code Section 501(c)(3) may purchase custodial
account plans funded by their employers with shares of Corporate Bond, Limited
Maturity Bond, U.S. Government, High Yield or Cash Fund or other Funds in the
Security Group in accordance with Code Section 403(b). Section 403(b) plans are
subject to numerous restrictions on the amount that may be contributed, the
persons who are eligible to participate and on the time when distributions may
commence.
SIMPLIFIED EMPLOYEE PENSION PLANS (SEPPS)
A prototype SEPP is available for corporations, partnerships or sole
proprietors desiring to adopt such a plan for purchases of IRAs for their
employees. Employers establishing a SEPP may contribute a maximum of $30,000 a
year to an IRA for each employee. This maximum is subject to a number of
limitations.
FINANCIAL STATEMENTS
The audited financial statements of the Funds, which are contained in the
Funds' Annual Report dated December 31, 1996, are incorporated herein by
reference. Copies of the Annual Report are provided to every person requesting
the Statement of Additional Information.
56
<PAGE>
TAX-EXEMPT VS. TAXABLE INCOME
The following table shows the approximate taxable yields for individuals
that are equivalent to tax-exempt yields using the 1997 tax rates contained in
the Internal Revenue Code as modified by the Tax Reform Act of 1986. Beginning
in 1989, federal income brackets will be indexed each year to reflect changes in
the Consumer Price Index. The table illustrates what you would have to earn on
taxable investments to equal a given tax-exempt yield in your income tax
bracket. Locate your income (after deductions and exemptions), then locate your
tax bracket based on joint or single tax filing. Read across to the equivalent
taxable yield you would need to match a given tax-free yield. There is, of
course, no assurance that an investment in Tax-Exempt Fund will result in the
realization of any particular return.
<TABLE>
<CAPTION>
- ------- ----------------------------------------- ---------- --------------------------------------------------------------
Your
income
tax
If your taxable income is: bracket And a tax-free yield of:
Joint Return Single Return is: 5% 6% 7% 8% 9% 10% 11% 12%
- ------- -------------------- -------------------- ---------- ------- ------- ------- ------ ------- ------- ------- -------
1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 41,200 0 - 24,650 15.0% 5.88 7.06 8.24 9.41 10.59 11.76 12.94 14.12
41,200 - 99,600 24,650 - 59,750 28.0 6.94 8.33 9.72 11.11 12.50 13.89 15.28 16.67
99,600 - 151,750 59,750 - 124,650 31.0 7.25 8.70 10.14 11.59 13.04 14.49 15.94 17.39
151,750 - 271,050 124,650 - 271,050 36.0 7.81 9.38 10.94 12.50 14.06 15.63 17.19 18.75
271,050 and over 271,050 and over 39.6 8.28 9.93 11.59 13.25 14.90 16.56 18.21 19.87
- ------- -------------------- -------------------- ---------- ------- ------- ------- ------ ------- ------- ------- -------
</TABLE>
57
<PAGE>
APPENDIX A
CLASS A SHARES OF CORPORATE BOND, LIMITED MATURITY BOND, U.S. GOVERNMENT, HIGH
YIELD AND TAX-EXEMPT FUNDS
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of Corporate Bond, Limited Maturity
Bond, U.S. Government, High Yield and Tax-Exempt Funds alone or in combination
with Class A shares of other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation, a Statement of Intention or Letters of
Intent, the term "Purchaser" includes the following persons: an individual; his
or her spouse and children under the age 21; a trustee or other fiduciary of a
single trust estate or single fiduciary account established for their benefit;
an organization exempt from federal income tax under Section 501(c)(3) or (13)
of the Internal Revenue Code; or a pension, profit-sharing or other employee
benefit plan whether or not qualified under Section 401 of the Internal Revenue
Code.
RIGHTS OF ACCUMULATION
To reduce sales charges on purchases of Corporate Bond Fund, Limited
Maturity Bond Fund, U.S. Government Fund, High Yield or Tax-Exempt Fund, a
Purchaser may combine all previous purchases with a contemplated current
purchase of Class A shares of a Fund for the purpose of determining the sales
charge applicable to the current purchase. For example, an investor who already
owns Class A shares of a Fund either worth $30,000 at the applicable current
offering price or purchased for $30,000 and who invests an additional $25,000,
is entitled to a reduced sales charge of 3.75% on the latter purchase. The
Distributor must be notified when a sale takes place which would qualify for the
reduced charge on the basis of previous purchases subject to confirmation of the
investor's holdings through the Fund's records. Rights of accumulation apply
also to purchases representing a combination of the Class A shares of Corporate
Bond Fund, Limited Maturity Bond Fund, U.S. Government Fund, High Yield,
Tax-Exempt Fund, Security Growth and Income, Security Ultra Fund, or Security
Equity Fund in those states where shares of the Funds being purchased are
qualified for sale.
STATEMENT OF INTENTION
A Purchaser in Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield or Tax-Exempt Funds may sign a Statement of Intention, which may be signed
within 90 days after the first purchase to be included thereunder, in the form
provided by the Distributor covering purchases of Corporate Bond Fund, Limited
Maturity Bond Fund, U.S. Government Fund, High Yield, Tax-Exempt Fund, Security
Equity Fund, Security Growth and Income Fund, or Security Ultra Fund to be made
within a period of 13 months (or a 36-month period for purchases of $1 million
or more) and thereby become eligible for the reduced front-end sales charge
applicable to the actual amount purchased under the Statement. Five percent of
the amount specified in the Statement of Intention will be held in escrow shares
until the Statement is completed or terminated. The shares so held may be
redeemed by the Fund if the investor is required to pay additional sales charge
which may be due if the amount of purchases made by the investor during the
period the Statement is effective is less than the total specified in the
Statement of Intention.
A Statement of Intention may be revised during the 13-month period (or, if
applicable, 36-month period). Additional Class A shares received from
reinvestment of income dividends and capital gains distributions (if any are
realized) are included in the total amount used to determine reduced sales
charges. The Statement is not a binding obligation upon the investor to purchase
or any Fund to sell the full indicated amount. An investor considering signing
such an agreement should read the Statement of Intention carefully. A Statement
of Intention form may be obtained from the Investment Manager.
58
<PAGE>
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of Corporate Bond Fund,
Limited Maturity Bond Fund, U.S. Government Fund, High Yield Fund or Tax-Exempt
Fund have a one-time privilege (1) to reinstate their accounts by purchasing
shares of the Fund without a sales charge up to the dollar amount of the
redemption proceeds, or (2) to the extent the redeemed shares would have been
eligible for the exchange privilege, to purchase Class A shares of another of
the Funds, Security Equity Fund, Security Ultra Fund, or Security Growth and
Income Fund up to the dollar amount of the redemption proceeds at a sales charge
equal to the additional sales charge, if any, which would have been applicable
had the redeemed shares been exchanged pursuant to the exchange privilege.
Written notice and a check in the amount of the reinvestment from eligible
stockholders wishing to exercise this reinstatement privilege must be received
by the Fund within thirty days after the redemption request was received (or
such longer period as may be permitted by rules and regulations promulgated
under the Investment Company Act of 1940). The net asset value used in computing
the amount of shares to be issued upon reinstatement or exchange will be the net
asset value on the day that notice of the exercise of the privilege is received.
Stockholders making use of the reinstatement privilege should note that any
gains realized upon the redemption will be taxable while any losses may be
deferred under the "wash sale" provision of the Internal Revenue Code.
59
<PAGE>
- --------------------------------------------------------------------------------
MFR EMERGING MARKETS TOTAL RETURN SERIES
MFR GLOBAL ASSET ALLOCATION SERIES
MFR GLOBAL HIGH YIELD SERIES
(formerly Global Aggressive Bond Series)
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
RELATING TO THE PROSPECTUS DATED MAY 1, 1997,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
(800) 643-8188
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
MFR Advisors, Inc.
One Liberty Plaza, 46th Floor
New York, New York 10006
DISTRIBUTOR
Security Distributors, Inc.
700 SW Harrison Street
Topeka, Kansas 66636-0001
SUB-ADVISERS
Lexington Management Corporation
Park 80 West, Plaza Two
Saddle Brook, New Jersey 07663
Security Management Company, LLC
700 SW Harrison Street
Topeka, Kansas 66636-0001
CUSTODIAN
Chase Manhattan Bank
4 Chase MetroTech Center
Brooklyn, New York 11245
INDEPENDENT AUDITORS
Ernst & Young LLP
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105-2143
<PAGE>
MFR EMERGING MARKETS TOTAL RETURN SERIES
MFR GLOBAL ASSET ALLOCATION SERIES
MFR GLOBAL HIGH YIELD SERIES
700 SW Harrison, Topeka, Kansas 66636-0001
STATEMENT OF
ADDITIONAL INFORMATION
May 1, 1997
(RELATING TO THE PROSPECTUS DATED MAY 1, 1997,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME)
This Statement of Additional Information is not a Prospectus. It should be
read in conjunction with the Prospectus dated May 1, 1997, as it may be
supplemented from time to time. A Prospectus may be obtained by writing or
calling Security Distributors, Inc., 700 SW Harrison, Topeka, Kansas 66636-0001,
or by calling (800) 643-8188.
TABLE OF CONTENTS
Page
General Information....................................................... 1
Investment Objectives and Policies of the Series.......................... 2
MFR Emerging Markets Total Return Series................................ 2
MFR Global Asset Allocation Series...................................... 4
MFR Global High Yield Series............................................ 6
Investment Methods and Risk Factors....................................... 8
Investment Policy Limitations............................................. 23
Officers and Directors.................................................... 24
Remuneration of Directors and Others...................................... 26
How to Purchase Shares.................................................... 26
Alternative Purchase Options............................................ 27
Class A Shares.......................................................... 27
Class A Distribution Plan............................................... 28
Class B Shares.......................................................... 28
Class B Distribution Plan............................................... 29
Calculation and Waiver of Contingent Deferred Sales Charges............. 30
Arrangements With Broker/Dealers and Others............................... 30
Purchases at Net Asset Value.............................................. 31
Accumulation Plan......................................................... 31
Systematic Withdrawal Program............................................. 31
Investment Management..................................................... 32
Portfolio Management.................................................... 34
Code of Ethics.......................................................... 35
Distributor............................................................... 35
Allocation of Portfolio Brokerage......................................... 35
Determination of Net Asset Value.......................................... 36
How to Redeem Shares...................................................... 37
Telephone Redemptions................................................... 38
How to Exchange Shares.................................................... 38
Exchange by Telephone................................................... 39
Dividends and Taxes....................................................... 39
Organization.............................................................. 42
Custodian, Transfer Agent and Dividend-Paying Agent....................... 43
Independent Auditors...................................................... 43
Performance Information................................................... 43
Retirement Plans.......................................................... 44
Individual Retirement Accounts (IRAs)..................................... 45
SIMPLE IRAs............................................................... 45
Pension and Profit-Sharing Plans.......................................... 46
403(b) Retirement Plans................................................... 46
Simplified Employee Pension Plans (SEPPs)................................. 46
Financial Statements...................................................... 46
Appendix A................................................................ 47
<PAGE>
GENERAL INFORMATION
MFR Emerging Markets Total Return Series, MFR Global Asset Allocation
Series, and MFR Global High Yield Series (the "Series") are series of Security
Income Fund (the "Fund"), a diversified open-end management investment company
(commonly known as a mutual fund). The Fund was organized as a Kansas
corporation on April 20, 1965. The Fund is registered with the Securities and
Exchange Commission ("SEC"), which registration does not involve supervision by
the SEC of the management or policies of the Series. The name of the Global High
Yield Series was Global Aggressive Bond Series prior to May 1, 1997. The
investment objective and policies of the Series under its former name were
identical to those of the Series presently. The Series, upon the demand of the
investor, must redeem their shares and pay the investor the current net asset
value thereof. ( See "How to Redeem Shares," page 37.)
Each Series has its own investment objective and policies which are
described below. While there is no present intention to do so, the investment
objective and policies of any Series, unless otherwise noted, may be changed by
the Fund's Board of Directors without the approval of stockholders. Each of the
Series is also required to operate within limitations imposed by its fundamental
investment policies which may not be changed without stockholder approval. These
limitations are set forth below under "Investment Policy Limitations," page 23.
An investment in one of the Series does not constitute a complete investment
program.
The value of the shares of each Series fluctuates with the value of the
portfolio securities. Each Series may realize losses or gains when it sells
portfolio securities and will earn income to the extent that it receives
dividends or interest from its investments. (See "Dividends and Taxes," page
39.)
The shares of the Series are sold to the public at net asset value, plus a
sales commission which is divided between the principal distributor and dealers
who sell the shares ("Class A shares"), or at net asset value with a contingent
deferred sales charge ("Class B shares"). (See "How to Purchase Shares," page
26.)
The Series receive investment advisory services from MFR Advisors, Inc.
("MFR") and administrative, accounting, and transfer agency services from
Security Management Company, LLC ("SMC") for a fee. MFR has guaranteed that the
aggregate annual expenses of the Series (including management compensation but
excluding brokerage commissions, interest, taxes, extraordinary expenses and
Class B distribution fees) shall not exceed any expense limitation imposed by
any state. MFR has engaged Lexington Management Corporation ("Lexington") to
provide certain sub-advisory services to each Series and SMC to provide
sub-advisory services to the Global Asset Allocation Series with respect to its
investments in domestic equity securities. (See page 32 for a discussion of MFR
and the Investment Advisory Contract.)
Each Series will pay all of its expenses not assumed by MFR or Security
Distributors, Inc. (the "Distributor") including organization expenses;
directors' fees; fees of custodian; taxes and governmental fees; interest
charges; any membership dues; brokerage commissions; expenses of preparing and
distributing reports to stockholders; costs of stockholder and other meetings;
and legal, auditing and accounting expenses. Each Series also will pay for the
preparation and distribution of the prospectus to its stockholders and all
expenses in connection with its registration under the Investment Company Act of
1940 and the registration of its capital stock under federal and state
securities laws. Each Series will pay nonrecurring expenses as may arise,
including litigation expenses affecting it.
Under a Distribution Plan adopted with respect to the Class A shares of the
Series pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"), the Series are authorized to pay to the Distributor, an annual fee
equal to .25% of the average daily net assets of the Class A shares of the
Series to finance various distribution-related activities. (See "Class A
Distribution Plan," page 28.)
Under a Distribution Plan adopted with respect to the Class B shares of the
Series pursuant to Rule 12b-1 under the 1940 Act, each Series is authorized to
pay to the Distributor, an annual fee of 1.00% of the average daily net assets
of the Class B Shares of the respective Series to finance various
distribution-related activities. (See "Class B Distribution Plan," page 29.)
The portfolio turnover rate for the Global High Yield Series for the fiscal
year ended December 31, 1996, was 96% and for the period June 1, 1995 (date of
inception) to December 31, 1995, was 127% on an annualized basis. Portfolio
turnover is the percentage of the lower of security sales or purchases to the
average portfolio value and would be 100% if all securities in the Series were
replaced within a period of one year. Portfolio turnover information is not yet
available for the Emerging Markets Total Return and Global Asset Allocation
Series as they did not begin operations until May 1, 1997.
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE SERIES
Each Series represents a different investment objective and has its own
identified assets and net asset values. The investment objective of each Series
is described below. There are risks inherent in the ownership of any security
and there can be no assurance that such investment objective will be achieved.
Some of the risks are described below.
The Fund makes no representation that the stated investment objective of
any Series will be achieved. Although there is no present intention to do so,
the investment objective of any Series may be altered by the Board of Directors
of the Fund without the approval of stockholders of the Series.
MFR EMERGING MARKETS TOTAL RETURN SERIES
The investment objective of MFR Emerging Markets Total Return Series is to
seek to maximize total return. The Series under normal circumstances invests
substantially all of its assets in a portfolio of emerging country and emerging
market equity and debt securities. Equity securities will consist of all types
of common stocks and equivalents (the following constitute equivalents:
convertible debt securities and warrants). The Series also may invest in
preferred stocks, bonds, money market instruments of foreign and domestic
companies, U.S. government, and governmental agencies and debt securities of
sovereign emerging market issuers. The Series may invest up to 100% of its total
assets in U.S. and foreign debt securities and other fixed income securities
that, at the time of purchase, are rated below investment grade ("high yield
securities" or "junk bonds"), which involve a high degree of risk and are
predominantly speculative. The Series also may invest in zero coupon securities
and securities that are in default as to payment of principal and/or interest. A
description of certain debt ratings is included as Appendix A to the Prospectus.
See "Investment Methods and Risk Factors" for a discussion of the risks
associated with investing in junk bonds and zero coupon securities. Many
emerging market debt securities are not rated by United States rating agencies
such as Moody's and Standard & Poor's. The Series' ability to achieve its
investment objective is thus more dependent on the credit analysis of MFR
Advisors, Inc. ("MFR") than would be the case if the Series were to invest in
higher quality bonds. The Series may invest in fixed income securities without
limitation as to maturity. INVESTORS SHOULD PURCHASE SHARES ONLY AS A SUPPLEMENT
TO AN OVERALL INVESTMENT PROGRAM AND ONLY IF WILLING TO UNDERTAKE THE RISKS
INVOLVED.
"Emerging markets" will consist of all countries determined by the World
Bank or the United Nations to have developing or emerging economies and markets.
These countries are generally expected to include every country in the world
except the United States, Canada, Japan, Australia, New Zealand and most
countries in Western Europe.
Currently, investing in many of the emerging countries and emerging markets
is not feasible. Accordingly, MFR currently intends to consider investments only
in those countries in which it believes investing is feasible. The list of
acceptable countries will be reviewed by MFR and approved by the Board of
Directors on a periodic basis and any additions or deletions with respect to
such list will be made in accordance with changing economic and political
circumstances involving such countries.
An issuer in an emerging market is an entity: (i) for which the principal
securities trading market is an emerging market, as defined above; (ii) that
(alone or on a consolidated basis) derives 50% or more of its total revenue from
either goods produced, sales made or services performed in emerging markets; or
(iii) organized under the laws of, and with a principal office in, an emerging
market.
The Series' investments in emerging country securities are not subject to
any maximum limit, and it is the intention of MFR to invest substantially all of
the Series' assets in emerging country and emerging market securities. However,
to the extent that the Series' assets are not invested in emerging country and
emerging market securities, the remaining 35% of the assets may be invested in
(i) other equity and debt securities without regard to whether they qualify as
emerging country or emerging market securities, and (ii) cash reserves of the
type described under "Investment Methods and Risk Factors" in the Prospectus. In
addition, for temporary defensive purposes, the Series may invest less than 65%
of its assets in emerging country and emerging market securities, in which case
the Series may invest in other equity or debt securities or may invest in cash
reserves without limitation.
The Series' investments in emerging market debt securities consist
substantially of high yield, lower-rated debt securities of foreign
corporations, and "Brady Bonds" and other sovereign debt securities issued by
emerging market governments. "Sovereign debt securities" are those issued by
emerging market governments that are
2
<PAGE>
traded in the markets of developed countries or groups of developed countries.
MFR may invest in debt securities of emerging market issuers that it determines
to be suitable investments for the Series without regard to ratings. Currently,
the substantial majority of emerging market debt securities are considered to
have a credit quality below investment grade. The Series may invest up to 100%
of its total assets in debt securities with credit quality below investment
grade (known as "junk bonds"). Such securities are predominantly speculative and
involve a high degree of risk as discussed under "Investment Methods and Risk
Factors." The Series may invest in bank loan participations and assignments,
which are fixed and floating rate loans arranged through private negotiations
between foreign or domestic entities.
The Series invests in securities allocated among diverse markets and
denominated in various currencies, including U.S. dollars, or in multinational
currency units such as European Currency Units. The Series may purchase
securities that are issued by the government or a company or financial
institution of one country but denominated in the currency of another country
(or a multinational currency unit). The Series is designed for investors who
wish to accept the risks entailed in such investments, which are different from
those associated with a portfolio consisting entirely of securities of U.S.
issuers denominated in U.S. dollars. See the discussion of such risks, including
currency risk, under "Investment Methods and Risk Factors."
MFR selectively will allocate the assets of the Series in securities of
issuers in countries and in currency denominations where the combination of
market returns, the price appreciation potential of securities and currency
exchange rate movements will present opportunities for maximum total return. In
so doing, MFR intends to take advantage of the different yield, risk and return
characteristics that investment in the security markets of different countries
can provide for U.S. investors. Fundamental economic strength, credit quality,
earnings growth potential and currency and market trends will be the principal
determinants of the emphasis given to various country, geographic and industry
sectors within the Series.
MFR evaluates currencies on the basis of fundamental economic criteria
(e.g., relative inflation and interest rate levels and trends, growth rate
forecasts, balance of payments status and economic policies) as well as
technical and political data. If the currency in which a security is denominated
appreciates against the U.S. dollar, the dollar value of the security will
increase. Conversely, if the exchange rate of the foreign currency declines, the
dollar value of the security will decrease. However, the Series may seek to
protect itself against such negative currency movements through the use of
sophisticated investment techniques. See the discussion of forward currency
transactions, options and futures under "Investment Methods and Risk Factors."
Futures may be used to gain exposure to markets where there is insufficient
cash to purchase a diversified portfolio of securities. Currencies may be held
to gain exposure to an international market prior to investing in a non-dollar
security.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or as
an efficient means of adjusting its exposure to the bond, stock, and currency
markets. The Series will not use futures contracts for leveraging purposes. The
Series will limit its use of futures contracts so that initial margin deposits
or premiums on such contracts used for non-hedging purposes will not equal more
than 5 percent of the Series' net asset value. The Series may also write call
and put options on a covered basis and purchase put and call options on
securities, financial indices, and currencies. The aggregate market value of the
Series' portfolio securities or currencies covering call or put options will not
exceed 25 percent of the Series' net assets. The Series may enter into foreign
futures and options transactions. See the discussion of options and futures
contracts under "Investment Methods and Risk Factors." As part of its investment
program and to maintain greater flexibility, the Series may invest in
instruments which have the characteristics of futures, options and securities,
known as "hybrid instruments." For a discussion of such instruments and the
risks involved in investing therein, see "Investment Methods and Risk Factors"
in the Prospectus.
The Series may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis in order to hedge
against anticipated changes in interest rates and prices. See the discussion of
when-issued and forward commitment securities under "Investment Methods and Risk
Factors." The Series may enter into repurchase agreements, reverse repurchase
agreements and "dollar rolls" which are discussed under "Investment Methods and
Risk Factors." The Series may also invest in restricted securities as discussed
under "Investment Methods and Risk Factors."
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MFR GLOBAL ASSET ALLOCATION SERIES
The investment objective of MFR Global Asset Allocation Series is to seek a
high level of total return by investing primarily in a diversified portfolio of
fixed income and equity securities. The Series is designed to balance the
potential appreciation of common stocks with the income and relative stability
of principal of bonds over the long term. The primary consideration in varying
the asset allocation mix will be the fundamental economic outlook of the Series'
Adviser, MFR, for the different markets in which the Series invests. Shifts
between the fixed income and equity sectors will normally be done gradually and
MFR will not attempt to precisely "time" the market. There is, of course, no
guarantee that MFR's gradual approach to allocating the Series' assets will be
successful in achieving the Series' objective. The Series will maintain cash
reserves to facilitate the Series' cash flow needs (redemptions, expenses and
purchases of Series securities) and it may invest in cash reserves without
limitation for temporary defensive purposes. See the discussion of cash reserves
under "Investment Methods and Risk Factors" in the Prospectus.
Assets allocated to the fixed income portion of the Series will be invested
primarily in U.S. and foreign investment grade bonds, high yield bonds (U.S. and
foreign, including "Brady Bonds"), short-term investments and currencies, as
needed to gain exposure to foreign markets. Investment grade debt securities
include long, intermediate and short-term investment grade debt securities
(e.g., AAA, AA, A or BBB by S&P or if not rated, of equivalent investment
quality as determined by MFR). The weighted average maturity for this portion
(investment grade debt securities) of the Series' portfolio is generally
expected to be intermediate (3-10 years), although it may vary significantly.
Non-dollar debt securities include non-dollar denominated government and
corporate debt securities or currencies. See "Investment Methods and Risk
Factors" for a discussion of the risks involved in foreign investing. High-yield
securities include high-yielding, income-producing debt securities in the lower
rating categories (commonly referred to as "junk bonds") and preferred stocks
including convertible securities. High yield bonds may be purchased without
regard to maturity; however, the average maturity is expected to be
approximately 10 years, although it may vary if market conditions warrant.
Quality will generally range from lower medium to low and the Series may also
purchase bonds in default if, in the opinion of MFR, there is significant
potential for capital appreciation. Lower-rated debt obligations are generally
considered to be high risk investments. See "Investment Methods and Risk
Factors" for a discussion of the risks involved in investing in high-yield,
lower-rated debt securities. The Series may invest in zero coupon securities
that pay no interest prior to maturity and payment in kind securities that pay
interest in the form of additional securities. See the discussion of such
securities under "Investment Methods and Risk Factors" in the Prospectus.
Securities which may be held as cash reserves include liquid short-term
investments of one year or less rated within the top two categories by at least
one established rating organization, or if not rated, of equivalent investment
quality as determined by MFR. The Series may use currencies to gain exposure to
an international market prior to investing in non-dollar securities.
The Series' equity sector will be allocated among large and small capital
("Large Cap" and "Small Cap" respectively) U.S. and non-dollar equity
securities, currencies, real estate investment trusts ("REITs"), and futures.
See the discussion of REITs under "Investment Methods and Risk Factors" in the
Prospectus. Large Cap securities generally include stocks of well established
companies with capitalization over $1 billion which can produce increasing
dividend income. Non-dollar securities include foreign currencies and common
stocks of established non-U.S. companies. Investments may be made solely for
capital appreciation or solely for income or any combination of both for the
purpose of achieving a higher overall return. MFR intends to diversify the
non-dollar portion of the Series' portfolio broadly among countries and normally
to have at least three different countries represented. The countries of the Far
East and Western Europe as well as South Africa, Australia, Canada, and other
areas (including developing countries) may be included. Under unusual
circumstances, however, investment may be substantially in one or two countries.
Futures may be used to gain exposure to equity markets where there is
insufficient cash to purchase a diversified portfolio of stocks. Currencies also
may be held to gain exposure to an international market prior to investing in a
non-dollar stock.
Small Cap securities include common stocks of small companies or companies
which offer the possibility of accelerated earnings growth because of
rejuvenated management, new products or structural changes in the economy.
Current income is not a factor in the selection of these stocks. Higher risks
are often associated with small companies. These companies may have limited
product lines, markets and financial resources, or they may be dependent on a
small or inexperienced management group. In addition, their securities may trade
less
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frequently and in limited volume and move more abruptly than securities of
larger companies. However, securities of smaller companies may offer greater
potential for capital appreciation since they are often overlooked or
undervalued by investors.
Until the Series reaches approximately $20 million in assets, the Series
may be unable to prudently achieve diversification among the described asset
classes. During this initial period, the Series may use futures contracts and
purchase foreign currencies to a greater extent than it will once the start-up
period is over. See "Investment Methods and Risk Factors."
Some of the countries in which the Series may invest may be considered to
be developing and may involve special risks. For a discussion of the risks
involved in investment in foreign securities, including investment in emerging
markets, see "Investment Methods and Risk Factors." The Series' foreign
investments are also subject to currency risk described under "Investment
Methods and Risk Factors". To manage this risk and facilitate the purchase and
sale of foreign securities, the Series may engage in foreign currency
transactions involving the purchase and sale of forward foreign currency
exchange contracts. Although forward currency transactions will be used
primarily to protect the Series from adverse currency movements, they also
involve the risk that anticipated currency movements will not be accurately
predicted and the Series' total return could be adversely affected as a result.
For a discussion of forward currency transactions and the risks associated with
such transactions, see "Investment Methods and Risk Factors." Purchases by the
Series of currencies in substitution of purchases of stocks and bonds will
subject the Series to risks different from a fund invested solely in stocks and
bonds.
The Series' investments include, but are not limited to, equity and fixed
income securities of any type and the Series may utilize the investment methods
and investment vehicles described below.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or as
an efficient means of adjusting its exposure to the bond, stock, and currency
markets. The Series will not use futures contracts for leveraging purposes. The
Series will limit its use of futures contracts so that initial margin deposits
or premiums on such contracts used for non-hedging purposes will not equal more
than 5% of the Series' net asset value. The Series may also write call and put
options on a covered basis and purchase put and call options on securities,
financial indices, and currencies. The aggregate market value of the Series'
portfolio securities or currencies covering call or put options will not exceed
25% of the Series' net assets. The Series may enter into foreign futures and
options transactions. See the discussion of options and futures contracts under
"Investment Methods and Risk Factors." As part of its investment program and to
maintain greater flexibility, the Series may invest in instruments which have
the characteristics of futures, options and securities, known as "hybrid
instruments." For a discussion of such instruments and the risks involved in
investing therein, see "Investment Methods and Risk Factors" in the Prospectus.
The Series may acquire illiquid securities in an amount not exceeding 15%
of net assets. Because an active trading market does not exist for such
securities the sale of such securities may be subject to delay and additional
costs. The Series will not invest more than 15% of its total assets in
restricted securities (other than securities eligible for resale under Rule 144A
of the Securities Act of 1933). For a discussion of restricted securities, see
"Investment Methods and Risk Factors."
The Series may invest in asset-backed securities, which securities involve
certain risks. For a discussion of asset-backed securities and the risks
involved in investment in such securities, see the discussion under "Investment
Methods and Risk Factors." The Series may invest in mortgage-backed securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
or institutions such as banks, insurance companies and savings and loans. Some
of these securities, such as GNMA certificates, are backed by the full faith and
credit of the U.S. Treasury while others, such as Freddie Mac certificates, are
not. The Series also may invest in collateralized mortgage obligations (CMOs)
and stripped mortgage securities (a type of derivative). Stripped mortgage
securities are created by separating the interest and principal payments
generated by a pool of mortgage-backed bonds to create two classes of
securities, "interest only" (IO) and "principal only" (PO) bonds. There are
risks involved in mortgage-backed securities, CMOs and stripped mortgage
securities. See "Investment Methods and Risk Factors" for an additional
discussion of such securities and the risks involved therein.
While the Series will remain invested in primarily common stocks and bonds,
it may, for temporary defensive purposes, invest in cash reserves without
limitation. The Series may establish and maintain reserves as MFR believes is
advisable to facilitate the Series' cash flow needs. Cash reserves include money
market instruments, including repurchase agreements, in the two highest rating
categories. Short-term securities may be held in the
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equity sector as collateral for futures contracts. These securities are
segregated and may not be available for the Series' cash flow needs.
The Series may invest in debt or preferred equity securities convertible
into or exchangeable for equity securities and warrants. As a fundamental
policy, for the purpose of realizing additional income, the Series may lend
securities with a value of up to 33 1/3% of its total assets to broker-dealers,
institutional investors, or other persons. Any such loan will be continuously
secured by collateral at least equal to the value of the securities loaned. For
a discussion of the limitations on lending and risks of lending, see "Investment
Methods and Risk Factors."
The Series may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis as discussed under
"Investment Methods and Risk Factors." The Series may enter into repurchase
agreements, reverse repurchase agreements, and "dollar rolls" also as discussed
under "Investment Methods and Risk Factors."
MFR GLOBAL HIGH YIELD SERIES
The investment objective of the Global High Yield Series is to seek high
current income. Capital appreciation is a secondary objective. The Series, under
normal circumstances, invests substantially all of its assets in debt securities
of issuers in the United States, developed foreign countries and emerging
markets. For purposes of its investment objective, Global High Yield Series
considers an emerging country to be any country whose economy and market the
World Bank or United Nations considers to be emerging or developing. The Series
also may invest in debt securities traded in any market, of companies that
derive 50% or more of their total revenue from either goods or services produced
in such emerging countries and emerging markets or sales made in such countries.
Determinations as to eligibility will be made by MFR and the Series'
Sub-Adviser, Lexington Management Corporation ("Lexington"), based on publicly
available information and inquiries made to the companies. It is possible in the
future that sufficient numbers of emerging country or emerging market debt
securities would be traded on securities markets in industrialized countries so
that a major portion, if not all, of the Series' assets would be invested in
securities traded on such markets, although such a situation is unlikely at
present.
Currently, investing in many of the emerging countries and emerging markets
is not feasible. Accordingly, MFR currently intends to consider investments only
in those countries in which it believes investing is feasible. The list of
acceptable countries will be reviewed by MFR and Lexington and approved by the
Board of Directors of the Series on a periodic basis and any additions or
deletions with respect to such list will be made in accordance with changing
economic and political circumstances involving such countries. The Series also
may invest in shares of other investment companies as discussed under
"Investment Methods and Risk Factors," below.
SELECTION OF DEBT INVESTMENTS. In determining the appropriate distribution
of investments among various countries and geographic regions for the Global
High Yield Series, MFR ordinarily will consider the following factors: prospects
for relative economic growth among the different countries in which the Series
may invest; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
the individual investment opportunities available to international investors.
Although the Series values assets daily in terms of U.S. dollars, the
Series does not intend to convert holdings of foreign currencies into U.S.
dollars on a daily basis. The Series will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference ("spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Series at one rate, while offering a lesser rate of exchange should the
Series desire to sell that currency to the dealer.
Global High Yield Series may invest in the following types of money market
instruments (i.e., debt instruments with less than 12 months remaining until
maturity) denominated in U.S. dollars or other currencies: (a) obligations
issued or guaranteed by the U.S. or foreign governments, their agencies,
instrumentalities or municipalities; (b) obligations of international
organizations designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development; (c) finance company obligations,
corporate commercial paper and other short-term commercial obligations; (d) bank
obligations (including certificates of deposit, time deposits, demand deposits
and bankers' acceptances), subject to the restriction that the Series may not
invest 25% or more of its total assets in bank securities; (e) repurchase
agreements with respect to the foregoing; and (f) other substantially similar
short-term debt securities with comparable characteristics.
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SAMURAI AND YANKEE BONDS. Subject to its fundamental investment
restrictions, Global High Yield Series may invest in yen-denominated bonds sold
in Japan by non-Japanese issuers ("Samurai bonds"), and may invest in
dollar-denominated bonds sold in the United States by non-U.S. issuers ("Yankee
bonds"). It is the policy of the Series to invest in Samurai or Yankee bond
issues only after taking into account considerations of quality and liquidity,
as well as yield.
COMMERCIAL BANK OBLIGATIONS. For the purposes of Global High Yield Series'
investment policies with respect to bank obligations, obligations of foreign
branches of U.S. banks and of foreign banks are obligations of the issuing bank
and may be general obligations of the parent bank. Such obligations, however,
may be limited by the terms of a specific obligation and by government
regulation. As with investment in non-U.S. securities in general, investments in
the obligations of foreign branches of U.S. banks and of foreign banks may
subject the Series to investment risks that are different in some respects from
those of investments in obligations of domestic issuers. Although the Series
typically will acquire obligations issued and supported by the credit of U.S. or
foreign banks having total assets at the time of purchase in excess of $1
billion, this $1 billion figure is not a fundamental investment policy or
restriction of the Series. For the purposes of calculation with respect to the
$1 billion figure, the assets of a bank will be deemed to include the assets of
its U.S. and non-U.S. branches.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS.
Global High Yield Series may invest in repurchase agreements which are
agreements by which a purchaser acquires a security and simultaneously commits
to resell that security to the seller (a bank or broker/dealer) at an agreed
upon price on an agreed upon date within a number of days (usually not more than
seven) from the date of purchase. Global High Yield Series will not enter into a
repurchase agreement with a maturity of more than seven days if, as a result,
more than 15% of the value of its total net assets would be invested in such
repurchase agreements and other illiquid investments and securities for which no
readily available market exists. Repurchase agreements are discussed in more
detail under "Investment Methods and Risk Factors."
Global High Yield Series may enter into reverse repurchase agreements. A
reverse repurchase agreement is a borrowing transaction in which the Series
transfers possession of a security to another party, such as a bank or
broker/dealer, in return for cash, and agrees to repurchase the security in the
future at an agreed upon price, which includes an interest component. The Series
also may engage in "roll" borrowing transactions which involve the Series' sale
of fixed income securities together with a commitment (for which the Series may
receive a fee) to purchase similar, but not identical, securities at a future
date. Global High Yield Series will maintain, in a segregated account with a
custodian, cash or liquid securities in an amount sufficient to cover its
obligation under "roll" transactions and reverse repurchase agreements.
BORROWING. Global High Yield Series is prohibited from borrowing money in
order to purchase securities. The Series may borrow up to 5% of its total assets
for temporary or emergency purposes other than to meet redemptions. See the
discussion of borrowing under "Investment Methods and Risk Factors."
SHORT SALES. The Series is authorized to make short sales of securities,
although it has no current intention of doing so. A short sale is a transaction
in which the Series sells a security in anticipation that the market price of
that security will decline. The Series may make short sales as a form of hedging
to offset potential declines in long positions in securities it owns and in
order to maintain portfolio flexibility. The Series only may make short sales
"against the box." In this type of short sale, at the time of the sale, the
Series owns the security it has sold short or has the immediate and
unconditional right to acquire the identical security at no additional cost.
In a short sale, the seller does not immediately deliver the securities
sold and does not receive the proceeds from the sale. To make delivery to the
purchaser, the executing broker borrows the securities being sold short on
behalf of the seller. The seller is said to have a short position in the
securities sold until it delivers the securities sold, at which time it receives
the proceeds of the sale. To secure its obligation to deliver securities sold
short, the Series will deposit in a separate account with its custodian an equal
amount of the securities sold short or securities convertible into or
exchangeable for such securities at no cost. The Series could close out a short
position by purchasing and delivering an equal amount of the securities sold
short, rather than by delivering securities already held by the Series, because
the Series might want to continue to receive interest and dividend payments on
securities in its portfolio that are convertible into the securities sold short.
Global High Yield Series might make a short sale "against the box" in order
to hedge against market risks when MFR believes that the price of a security may
decline, causing a decline in the value of a security owned by the Series or a
security convertible into or exchangeable for such security, or when MFR wants
to sell the security the Series owns at a current attractive price, but also
wishes to defer recognition of gain or loss for federal income
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tax purposes and for purposes of satisfying certain tests applicable to
regulated investment companies under the Internal Revenue Code of 1986, as
amended (the "Code"). In such case, any future losses in the Series' long
position should be reduced by a gain in the short position. Conversely, any gain
in the long position should be reduced by a loss in the short position. The
extent to which such gains or losses in the long position are reduced will
depend upon the amount of the securities sold short relative to the amount of
the securities the Series owns, either directly or indirectly, and, in the case
where a Series owns convertible securities, changes in the investment values or
conversion premiums of such securities. There will be certain additional
transaction costs associated with short sales "against the box," but the Series
will endeavor to offset these costs with income from the investment of the cash
proceeds of short sales.
ILLIQUID SECURITIES. The Series may invest up to 15% of total net assets in
illiquid securities. Securities may be considered illiquid if the Series cannot
reasonably expect to receive approximately the amount at which the Series values
such securities within seven days. The sale of illiquid securities, if they can
be sold at all, generally will require more time and result in higher brokerage
charges or dealer discounts and other selling expenses than will the sale of
liquid securities, such as securities eligible for trading on U.S. securities
exchanges or in the over-the-counter markets. Moreover, restricted securities,
which may be illiquid for purposes of this limitation often sell, if at all, at
a price lower than similar securities that are not subject to restrictions on
resale.
With respect to liquidity determinations generally, the Fund's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933, are liquid or illiquid. The Fund's Board has delegated
the function of making day-to-day determinations of liquidity to MFR in
accordance with procedures approved by the Fund's Board of Directors. MFR takes
into account a number of factors in reaching liquidity decisions, including, but
not limited to: (i) the frequency of trades and quotes; (ii) the number of
dealers and potential purchasers; (iii) the number of dealers that have
undertaken to make a market in the security; and (iv) the nature of the security
and how trading is effected (e.g., the time needed to sell the security, how
offers are solicited and the mechanics of transfer). MFR will monitor the
liquidity of securities held by the Series and report periodically on such
decisions to the Board of Directors.
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Series are described in the
"Investment Objectives and Policies" and "Investment Methods and Risk Factors"
sections of the Prospectus and in this Statement of Additional Information. The
following is a description of certain additional risk factors related to various
securities, instruments and techniques. The risks so described only apply to
those Series which may invest in such securities and instruments or which use
such techniques. Also included is a general description of some of the
investment instruments, techniques and methods which may be used by one or more
of the Series. The methods described only apply to those Series which may use
such methods. Although a Series may employ the techniques, instruments and
methods described below, consistent with its investment objective and policies
and any applicable law, no Series will be required to do so.
GENERAL RISK FACTORS. Each Series' net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions and its
net currency exposure. The value of fixed income securities held by the Series
generally fluctuates inversely with interest rate movements. In other words,
bond prices generally fall as interest rates rise and generally rise as interest
rates fall. Longer term bonds held by the Series are subject to greater interest
rate risk. There is no assurance that any Series will achieve its investment
objective.
SHARES OF OTHER INVESTMENT COMPANIES. Each of the Series may invest in
shares of other investment companies. A Series' investment in shares of other
investment companies may not exceed immediately after purchase 10% of the
Series' total assets and no more than 5% of its total assets may be invested in
the shares of any one investment company. Investment in the shares of other
investment companies has the effect of requiring shareholders to pay the
operating expenses of two mutual funds.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS.
Each of the Series may enter into repurchase agreements. Repurchase agreements
are transactions in which the purchaser buys a debt security from a bank or
recognized securities dealer and simultaneously commits to resell that security
to the bank or dealer at an agreed upon price, date and market rate of interest
unrelated to the coupon rate or maturity of the purchased security. Repurchase
agreements are considered to be loans which must be fully collateralized
including interest earned thereon during the entire term of the agreement. If
the institution defaults on the repurchase agreement, the Series will retain
possession of the underlying securities. If bankruptcy proceedings
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are commenced with respect to the seller, realization on the collateral by the
Series may be delayed or limited and the Series may incur additional costs. In
such case, the Series will be subject to risks associated with changes in market
value of the collateral securities. The Series intends to enter into repurchase
agreements only with banks and broker/dealers believed to present minimal credit
risks. Accordingly, the Series will enter into repurchase agreements only with
(a) brokers having total capitalization of at least $40 million and a ratio of
aggregate indebtedness to net capital of no more than 4 to 1, or, alternatively,
net capital equal to 6% of aggregate debit balances, or (b) banks having at
least $1 billion in assets and a net worth of at least $100 million as of its
most recent annual report. In addition, the aggregate repurchase price of all
repurchase agreements held by the Series with any broker shall not exceed 15% of
the total assets of the Series or $5 million, whichever is greater.
Each Series also may enter into reverse repurchase agreements with the same
parties with whom they may enter into repurchase agreements. Under a reverse
repurchase agreement, a Series would sell securities and agree to repurchase
them at a particular price at a future date. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale by a Series may decline below the price of the securities the Series has
sold but is obligated to repurchase. In the event the buyer of securities under
a reverse repurchase agreement files for bankruptcy or becomes insolvent, such
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Series' obligation to repurchase the securities, and the
Series' use of the proceeds of the reverse repurchase agreement may effectively
be restricted pending such decision.
Each Series also may enter into "dollar rolls," in which the Series sells
fixed income securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and maturity)
securities on a specified future date. During the roll period, the Series would
forego principal and interest paid on such securities. The Series would be
compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale.
BORROWING. Each of the Series may borrow money from banks as a temporary
measure for emergency purposes, or to facilitate redemption requests.
From time to time, it may be advantageous for the Series to borrow money
rather than sell existing portfolio positions to meet redemption requests.
Accordingly, the Series may borrow from banks and through reverse repurchase
agreements and "roll" transactions, in connection with meeting requests for the
redemption of Series shares. The Emerging Markets Total Return and Global Asset
Allocation Series may borrow up to 33 1/3%, and Global High Yield Series may
borrow up to 5% of total Series assets. To the extent that a Series purchases
securities while it has outstanding borrowings, it is using leverage, i.e. using
borrowed funds for investment. Leveraging will exaggerate the effect on net
asset value of any increase or decrease in the market value of a Series'
portfolio. Money borrowed for leveraging will be subject to interest costs that
may or may not be recovered by appreciation of the securities purchased; in
certain cases, interest costs may exceed the return received on the securities
purchased. A Series also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
LENDING OF PORTFOLIO SECURITIES. For the purpose of generating income, the
Global Asset Allocation Series may make secured loans of Series securities
amounting to not more than 33 1/3% of total assets. Securities loans are made to
broker/dealers, institutional investors, or other persons pursuant to agreements
requiring that the loans be continuously secured by collateral at least equal at
all times to the value of the securities lent marked to market on a daily basis.
The collateral received will consist of cash, U.S. Government securities,
letters of credit or such other collateral as may be permitted under its
investment program. While the securities are being lent, the Series will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Series has a right to call each loan
and obtain the securities on five business days' notice or, in connection with
securities trading on foreign markets, within such longer period of time which
coincides with the normal settlement period for purchases and sales of such
securities in such foreign markets. The Series will not have the right to vote
securities while they are being lent, but it will call a loan in anticipation of
any important vote. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans will only be made to
persons deemed by MFR (or Lexington or SMC) to be of good standing and will not
be made unless, in
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the judgment of MFR or the relevant sub-adviser, the consideration to be earned
from such loans would justify the risk.
RESTRICTED SECURITIES (RULE 144A SECURITIES). Each of the Series may invest
in restricted securities which are securities that are restricted as to
disposition under the federal securities laws, including securities that are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933. Rule 144A permits the resale to "qualified
institutional buyers" of "restricted securities" that, when issued, were not of
the same class as securities listed on a U.S. securities exchange or quoted in
the National Association of Securities Dealers Automated Quotation System (the
"Rule 144A Securities"). A "qualified institutional buyer" is defined by Rule
144A generally as an institution, acting for its own account or for the accounts
of other qualified institutional buyers, that in the aggregate owns and invests
on a discretionary basis at least $100 million in securities of issuers not
affiliated with the institution. A dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), acting for its own account or the
accounts of other qualified institutional buyers, that in the aggregate owns and
invests on a discretionary basis at least $10 million in securities of issuers
not affiliated with the dealer may also qualify as a qualified institutional
buyer, as well as an Exchange Act registered dealer acting in a riskless
principal transaction on behalf of a qualified institutional buyer.
The Fund's Board of Directors is responsible for developing and
establishing guidelines and procedures for determining the liquidity of Rule
144A Securities. As permitted by Rule 144A, the Board of Directors has delegated
this responsibility to MFR or the relevant sub-adviser. In making the
determination regarding the liquidity of Rule 144A Securities, MFR or the
relevant sub-adviser will consider trading markets for the specific security
taking into account the unregistered nature of a Rule 144A security. In
addition, it may consider: (1) the frequency of trades and quotes; (2) the
number of dealers and potential purchasers; (3) dealer undertakings to make a
market; and (4) the nature of the security and of the market place trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer). Investing in Rule 144A securities could have the
effect of increasing the amount of a Series' assets invested in illiquid
securities to the extent that qualified institutional buyers become
uninterested, for a time, in purchasing these securities.
Each Series also may purchase restricted securities that are not eligible
for resale pursuant to Rule 144A. The Series may acquire such securities through
private placement transactions, directly from the issuer or from security
holders, generally at higher yields or on terms more favorable to investors than
comparable publicly traded securities. However, the restrictions on resale of
such securities may make it difficult for the Series to dispose of such
securities at the time considered most advantageous, and/or may involve expenses
that would not be incurred in the sale of securities that were freely
marketable. Risks associated with restricted securities include the potential
obligation to pay all or part of the registration expenses in order to sell
certain restricted securities. A considerable period of time may elapse between
the time of the decision to sell a security and the time the Series may be
permitted to sell it under an effective registration statement. If, during a
period, adverse conditions were to develop, the Series might obtain a less
favorable price than prevailing when it decided to sell.
RISKS ASSOCIATED WITH LOWER-RATED DEBT SECURITIES AND COMPARABLE UNRATED
SECURITIES (JUNK BONDS). Each of the Series may invest in higher yielding debt
securities in the lower rating (higher risk) categories of the recognized rating
services (commonly referred to as "junk bonds") and unrated securities of
similar credit quality. Debt rated BB, B, CCC, CC and C by S&P and rated Ba, B,
Caa, Ca and C by Moody's, is regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation and C the highest degree of speculation. For Moody's, Ba
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Similarly, debt rated Ba or BB and below is
regarded by the relevant rating agency as speculative. Debt rated C by Moody's
or S&P is the lowest quality debt that is not in default as to principal or
interest and such issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Such securities are
also generally considered to be subject to greater risk than higher quality
securities with regard to a deterioration of general economic conditions. The
Series may invest in debt securities rated below C, which are in default as to
principal and/or interest. Ratings of debt securities represent the rating
agency's opinion regarding their quality and are not a guarantee of quality.
Rating agencies attempt to evaluate the safety of principal and interest
payments and do not evaluate the risks of fluctuations in market value. Also,
rating agencies may fail to make timely changes in
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credit quality in response to subsequent events, so that an issuer's current
financial condition may be better or worse than a rating indicates.
The market value of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower quality securities may
experience financial stress. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. Similarly, certain emerging market governments that issue lower
quality debt securities are among the largest debtors to commercial banks,
foreign governments and supranational organizations such as the World Bank and
may not be able or willing to make principal and/or interest repayments as they
come due. The risk of loss due to default by the issuer is significantly greater
for the holders of lower quality securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Lower quality debt securities of corporate issuers frequently have call or
buy-back features which would permit an issuer to call or repurchase the
security from the Series. If an issuer exercises these provisions in a declining
interest rate market, the Series may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition,
the Series may have difficulty disposing of lower quality securities because
there may be a thin trading market for such securities. There may be no
established retail secondary market for many of these securities, and the Series
anticipate that such securities could be sold only to a limited number of
dealers or institutional investors. The lack of a liquid secondary market also
may have an adverse impact on market prices of such instruments and may make it
more difficult for the Series to obtain accurate market quotations for purposes
of valuing the securities in the portfolio of the Series.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
quality securities, especially in a thinly traded market. The Series also may
acquire lower quality debt securities during an initial underwriting or may
acquire lower quality debt securities which are sold without registration under
applicable securities laws. Such securities involve special considerations and
risks.
Factors having an adverse effect on the market value of lower rated
securities or their equivalents purchased by the Series will adversely impact
net asset value of the Series. See "Risk Factors" in the Prospectus. In addition
to the foregoing, such factors may include: (i) potential adverse publicity;
(ii) heightened sensitivity to general economic or political conditions; and
(iii) the likely adverse impact of a major economic recession. The Series also
may incur additional expenses to the extent it is required to seek recovery upon
a default in the payment of principal or interest on its portfolio holdings, and
the Series may have limited legal recourse in the event of a default. Debt
securities issued by governments in emerging markets can differ from debt
obligations issued by private entities in that remedies from defaults generally
must be pursued in the courts of the defaulting government, and legal recourse
is therefore somewhat diminished. Political conditions, in terms of a
government's willingness to meet the terms of its debt obligations, also are of
considerable significance. There can be no assurance that the holders of
commercial bank debt may not contest payments to the holders of debt securities
issued by governments in emerging markets in the event of default by the
governments under commercial bank loan agreements.
MFR and Lexington will attempt to minimize the speculative risks associated
with investments in lower quality securities through credit analyses and by
carefully monitoring current trends in interest rates, political developments
and other factors. Nonetheless, investors should carefully review the investment
objectives and policies of the Series and consider their ability to assume the
investment risks involved before making an investment in the Series.
CONVERTIBLE SECURITIES AND WARRANTS. The Emerging Markets Total Return and
Global Asset Allocation Series may invest in debt or preferred equity securities
convertible into or exchangeable for equity securities. Traditionally,
convertible securities have paid dividends or interest at rates higher than
common stocks but lower than nonconvertible securities. They generally
participate in the appreciation or depreciation of the underlying
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stock into which they are convertible, but to a lesser degree. In recent years,
convertibles have been developed which combine higher or lower current income
with options and other features. Warrants are options to buy a stated number of
shares of common stock at a specified price any time during the life of the
warrants (generally two or more years).
MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS. The
Global Asset Allocation Series may invest in mortgage-backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). MBSs include certain securities issued or guaranteed by the
United States Government or one of its agencies or instrumentalities, such as
the Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), or Federal Home Loan Mortgage Corporation (FHLMC);
securities issued by private issuers that represent an interest in or are
collateralized by mortgage-backed securities issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities; and securities issued by
private issuers that represent an interest in or are collateralized by mortgage
loans. A mortgage pass-through security is a pro rata interest in a pool of
mortgages where the cash flow generated from the mortgage collateral is passed
through to the security holder. CMOs are obligations fully collateralized by a
portfolio of mortgages or mortgage-related securities. The Series may invest in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) and "principal-only" (PO) bonds, the market values of
which will generally be more volatile than the market values of most MBSs. An
inverse floating obligation is a derivative adjustable rate security with
interest rates that adjust or vary inversely to changes in market interest
rates. The term "residual interest" bond is used generally to describe those
instruments in collateral pools, such as CMOs, which receive any excess cash
flow generated by the pool once all other bondholders and expenses have been
paid. IOs and POs are created by separating the interest and principal payments
generated by a pool of mortgage-backed bonds to create two classes of
securities. Generally, one class receives interest only payments (IOs) and the
other class principal only payments (POs). MBSs have been referred to as
"derivatives" because the performance of MBSs is dependent upon and derived from
underlying securities.
CMOs may be issued in a variety of classes and the Series may invest in
several CMO classes, including, but not limited to Floaters, Planned
Amortization Classes (PACs), Scheduled Classes (SCHs), Sequential Pay Classes
(SEQs), Support Classes (SUPs), Target Amortization Classes (TACs) and Accrual
Classes (Z Classes). CMO classes vary in the rate and time at which they receive
principal and interest payments. SEQs, also called plain vanilla, clean pay, or
current pay classes, sequentially receive principal payments from underlying
mortgage securities when the principal on a previous class has been completely
paid off. During the months prior to their receipt of principal payments, SEQs
receive interest payments at the coupon rate on their principal. PACs are
designed to produce a stable cash flow of principal payments over a
predetermined period of time. PACs guard against a certain level of prepayment
risk by distributing prepayments to SUPs, also called companion classes. TACs
pay a targeted principal payment schedule, as long as prepayments are not made
at a rate slower than an expected constant prepayment speed. If prepayments
increase, the excess over the target is paid to SUPs. SEQs may have a less
stable cash flow than PACs and TACs and, consequently, have a greater potential
yield. PACs generally pay a lower yield than TACs because of PACs' lower risk.
Because SUPs are directly affected by the rate of prepayment of underlying
mortgages, SUPs may experience volatile cash flow behavior. When prepayment
speeds fluctuate, the average life of a SUP will vary. SUPs, therefore, are
priced at a higher yield than less volatile classes of CMOs. Z Classes do not
receive payments, including interest payments, until certain other classes are
paid off. At that time, the Z Class begins to receive the accumulated interest
and principal payments. A Floater has a coupon rate that adjusts periodically
(usually monthly) by adding a spread to a benchmark index subject to a lifetime
maximum cap. The yield of a Floater is sensitive to prepayment rates and the
level of the benchmark index.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. Prepayment risk reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's average
life and perhaps its yield. Borrowers are most likely to exercise their
prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others with
respect to the receipt of prepayments on the mortgages and the Series may invest
in CMOs which are subject to greater risk of prepayment as discussed above.
Market risk reflects the chance that the price of the security may fluctuate
over time. The price of MBSs may be particularly sensitive to prevailing
interest rates, the length of time the security is
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expected to be outstanding and the liquidity of the issue. In a period of
unstable interest rates, there may be decreased demand for certain types of
MBSs, and a Series invested in such securities wishing to sell them may find it
difficult to find a buyer, which may in turn decrease the price at which they
may be sold. Credit risk reflects the chance that the Series may not receive all
or part of its principal because the issuer or credit enhancer has defaulted on
its obligations. Obligations issued by U.S. Government-related entities are
guaranteed by the agency or instrumentality, and some, such as GNMA
certificates, are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the FNMA, are supported by the discretionary authority
of the U.S. Government to purchase the agency's obligations; still others, are
supported only by the credit of the instrumentality. Although securities issued
by U.S. Government-related agencies are guaranteed by the U.S. Government, its
agencies or instrumentalities, shares of the Series are not so guaranteed in any
way. The performance of private label MBSs, issued by private institutions, is
based on the financial health of those institutions.
ASSET-BACKED SECURITIES. The Global Asset Allocation Series also may invest
in "asset-backed securities." These include secured debt instruments backed by
automobile loans, credit card loans, home equity loans, manufactured housing
loans and other types of secured loans providing the source of both principal
and interest. Asset-backed securities are subject to risks similar to those
discussed above with respect to MBSs. See the discussion of asset-backed
securities in the Prospectus.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. Each of the Series may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. The price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Series will enter
into when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be. No income accrues on
securities which have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery of the securities. If a Series disposes of
the right to acquire a when-issued security prior to its acquisition or disposes
of its right to deliver or receive against a forward commitment, it may incur a
gain or loss. At the time a Series enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash or liquid
securities equal to the value of the when-issued or forward commitment
securities will be established and maintained with its custodian and will be
marked to market daily. There is a risk that the securities may not be delivered
and that the Series may incur a loss.
DERIVATIVE INSTRUMENTS: OPTIONS, FUTURES AND FORWARD CURRENCY STRATEGIES
WRITING COVERED CALL OPTIONS. Each of the Series may write (sell) covered
call options. Covered call options generally will be written on securities and
currencies which, in the opinion of MFR or the relevant sub-adviser, as
applicable, are not expected to make any major price moves in the near future
but which, over the long term, are deemed to be attractive investments.
A call option gives the holder (buyer) the right to purchase a security or
currency at a specified price (the exercise price) at any time until a certain
date (the expiration date). So long as the obligation of the writer of a call
option continues, he or she may be assigned an exercise notice by the
broker/dealer through whom such option was sold, requiring delivery of the
underlying security or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by purchasing an
option identical to that previously sold. MFR, Lexington and SMC believe that
writing covered call options is less risky than writing uncovered or "naked"
options, which the Series will not do.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with that Series' investment objectives. When writing a covered call option, the
Series in return for the premium gives up the opportunity for profit from a
price increase in the underlying security or currency above the exercise price,
and retains the risk of loss should the price of the security or currency
decline. Unlike one who owns securities or currencies not subject to an option,
a Series has no control over when it may be required to sell the underlying
securities or currencies, since the option may be exercised at any time prior to
the option's expiration. If a call option which a Series has written expires,
the Series will realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the
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underlying security or currency during the option period. If the call option is
exercised, a Series will realize a gain or loss from the sale of the underlying
security or currency.
The premium which a Series receives for writing a call option is deemed to
constitute the market value of an option. The premium the Series will receive
from writing a call option will reflect, among other things, the current market
price of the underlying security or currency, the relationship of the exercise
price to such market price, the historical price volatility of the underlying
security or currency, and the length of the option period. In determining
whether a particular call option should be written on a particular security or
currency, MFR or the relevant sub-adviser, as applicable, will consider the
reasonableness of the anticipated premium and the likelihood that a liquid
secondary market will exist for those options. The premium received by a Series
for writing covered call options will be recorded as a liability in the Series'
statement of assets and liabilities. This liability will be adjusted daily to
the option's current market value, which will be the latest sales price at the
time which the net asset value per share of the Series is computed at the close
of regular trading on the NYSE (currently, 3:00 p.m. Central time, unless
weather, equipment failure or other factors contribute to an earlier closing
time), or, in the absence of such sale, the latest asked price. The liability
will be extinguished upon expiration of the option, the purchase of an identical
option in a closing transaction, or delivery of the underlying security or
currency upon the exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit a Series to write
another call option on the underlying security or currency with either a
different exercise price, expiration date or both. If the Series desires to sell
a particular security or currency from its portfolio on which it has written a
call option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security or currency. There is no assurance
that the Series will be able to effect such closing transactions at favorable
prices. If the Series cannot enter into such a transaction, it may be required
to hold a security or currency that it might otherwise have sold, in which case
it would continue to be at market risk with respect to the security or currency.
The Series will pay transaction costs in connection with the writing of
options and in entering into closing purchase contracts. Transaction costs
relating to options activity normally are higher than those applicable to
purchases and sales of portfolio securities.
Call options written by the Series normally will have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to or above the current market values of the underlying
securities or currencies at the time the options are written. From time to time,
the Series may purchase an underlying security or currency for delivery in
accordance with the exercise of an option, rather than delivering such security
or currency from its portfolio. In such cases, additional costs will be
incurred.
The Series will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more, respectively, than
the premium received from the writing of the option. Because increases in the
market price of a call option generally will reflect increases in the market
price of the underlying security or currency, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security or currency owned by the Series.
WRITING COVERED PUT OPTIONS. Each of the Series may write covered put
options. A put option gives the purchaser of the option the right to sell, and
the writer (seller) the obligation to buy, the underlying security or currency
at the exercise price during the option period. The option may be exercised at
any time prior to its expiration date. The operation of put options in other
respects, including their related risks and rewards, is substantially identical
to that of call options.
The Series would write put options only on a covered basis, which means
that the Series would either (i) set aside cash or liquid securities in an
amount not less than the exercise price at all times while the put option is
outstanding (the rules of the Options Clearing Corporation currently require
that such assets be deposited in escrow to secure payment of the exercise
price), (ii) sell short the security or currency underlying the put option at
the same or higher price than the exercise price of the put option, or (iii)
purchase a put option, if the exercise price of the purchased put option is the
same or higher than the exercise price of the put option sold by the Series. The
Series generally would write covered put options in circumstances where MFR or
the relevant sub-adviser, wishes to purchase the underlying security or currency
for the Series' portfolio at a price lower than the current market price of the
security or currency. In such event, the Series would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the Series
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also would receive interest on debt securities or currencies maintained to cover
the exercise price of the option, this technique could be used to enhance
current return during periods of market uncertainty. The risk in such a
transaction would be that the market price of the underlying security or
currency would decline below the exercise price less the premiums received.
PURCHASING PUT OPTIONS. Each of the Series may purchase put options. As the
holder of a put option, the Series would have the right to sell the underlying
security or currency at the exercise price at any time during the option period.
The Series may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire.
The Series may purchase a put option on an underlying security or currency
("protective put") owned by the Series as a hedging technique in order to
protect against an anticipated decline in the value of the security or currency.
Such hedge protection is provided only during the life of the put option when
the Series, as the holder of the put option, is able to sell the underlying
security or currency at the put exercise price regardless of any decline in the
underlying security's market price or currency's exchange value. For example, a
put option may be purchased in order to protect unrealized appreciation of a
security or currency when MFR or the relevant sub-adviser, as applicable, deems
it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency eventually is sold.
The Series also may purchase put options at a time when the Series does not
own the underlying security or currency. By purchasing put options on a security
or currency it does not own, the Series seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price during
the life of the put option, the Series will lose its entire investment in the
put option. In order for the purchase of a put option to be profitable, the
market price of the underlying security or currency must decline sufficiently
below the exercise price to cover the premium and transaction cost, unless the
put option is sold in a closing sale transaction.
The premium paid by the Series when purchasing a put option will be
recorded as an asset in the Series' statement of assets and liabilities. This
asset will be adjusted daily to the option's current market value, which will be
the latest sale price at the time at which the net asset value per share of the
Series is computed (at the close of regular trading on the NYSE), or, in the
absence of such sale, the latest bid price. The asset will be extinguished upon
expiration of the option, the writing of an identical option in a closing
transaction, or the delivery of the underlying security or currency upon the
exercise of the option.
PURCHASING CALL OPTIONS. Each of the Series may purchase call options. As
the holder of a call option, the Series would have the right to purchase the
underlying security or currency at the exercise price at any time during the
option period. The Series may enter into closing sale transactions with respect
to such options, exercise them or permit them to expire. Call options may be
purchased by the Series for the purpose of acquiring the underlying security or
currency for its portfolio. Utilized in this fashion, the purchase of call
options would enable the Series to acquire the security or currency at the
exercise price of the call option plus the premium paid. At times, the net cost
of acquiring the security or currency in this manner may be less than the cost
of acquiring the security or currency directly. This technique also may be
useful to a Series in purchasing a large block of securities that would be more
difficult to acquire by direct market purchases. So long as it holds such a call
option rather than the underlying security or currency itself, the Series is
partially protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call option to
expire, incurring a loss only to the extent of the premium paid for the option.
The Series also may purchase call options on underlying securities or
currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options also may be purchased at times to
avoid realizing losses that would result in a reduction of the Series' current
return. For example, the Series has written a call option on an underlying
security or currency having a current market value below the price at which such
security or currency was purchased by the Series, an increase in the market
price could result in the exercise of the call option written by the Series and
the realization of a loss on the underlying security or currency with the same
exercise price and expiration date as the option previously written.
Aggregate premiums paid for put and call options will not exceed 5% of the
Series' total assets at the time of purchase.
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Each of the Series may attempt to accomplish objectives similar to those
involved in using Forward Contracts (defined below), as described in the
Prospectus, by purchasing put or call options on currencies. A put option gives
the Series as purchaser the right (but not the obligation) to sell a specified
amount of currency at the exercise price until the expiration of the option. A
call option gives the Series as purchaser the right (but not the obligation) to
purchase a specified amount of currency at the exercise price until its
expiration. The Series might purchase a currency put option, for example, to
protect itself during the contract period against a decline in the dollar value
of a currency in which it holds or anticipates holding securities. If the
currency's value should decline against the dollar, the loss in currency value
should be offset, in whole or in part, by an increase in the value of the put.
If the value of the currency instead should rise against the dollar, any gain to
the Series would be reduced by the premium it had paid for the put option. A
currency call option might be purchased, for example, in anticipation of, or to
protect against, a rise in the value against the dollar of a currency in which
the Series anticipates purchasing securities.
Currency options may be either listed on an exchange or traded
over-the-counter ("OTC options"). Listed options are third-party contracts
(i.e., performance of the obligations of the purchaser and seller is guaranteed
by the exchange or clearing corporation), and have standardized strike prices
and expiration dates. OTC options are two-party contracts with negotiated strike
prices and expiration dates. The Securities and Exchange Commission ("SEC")
staff considers OTC options and their cover to be illiquid securities. OTC
options will not be purchased unless the Series believes that daily valuations
for such options are readily obtainable. OTC options differ from exchange-traded
options in that OTC options are transacted with dealers directly and not through
a clearing corporation (which guarantees performance). Consequently, there is a
risk of non-performance by the dealer. Since no exchange is involved, OTC
options are valued on the basis of a quote provided by the dealer. In the case
of OTC options, there can be no assurance that a liquid secondary market will
exist for any particular option at any specific time.
OPTIONS ON STOCK INDICES. Options on stock indices are similar to options
on specific securities except that, rather than the right to take or make
delivery of the specific security at a specific price, an option on a stock
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of that stock index is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
multiplied by a specified multiple. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. Unlike options
on specific securities, all settlements of options on stock indices are in cash
and gain or loss depends on general movements in the stocks included in the
index rather than price movements in particular stocks. A stock index futures
contract is an agreement in which one party agrees to deliver to the other an
amount of cash equal to a specific amount multiplied by the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery of
securities is made.
RISK FACTORS IN OPTIONS ON INDICES. Because the value of an index option
depends upon the movements in the level of the index rather than upon movements
in the price of a particular security, whether the Series will realize a gain or
a loss on the purchase or sale of an option on an index depends upon the
movements in the level of prices in the market generally or in an industry or
market segment rather than upon movements in the price of the individual
security. Accordingly, successful use of positions will depend upon the ability
of MFR or the relevant sub-adviser to predict correctly movements in the
direction of the market generally or in the direction of a particular industry.
This requires different skills and techniques than predicting changes in the
prices of individual securities.
Index prices may be distorted if trading of securities included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
securities in the index. If this occurred, a Series would not be able to close
out options which it had written or purchased and, if restrictions on exercise
were imposed, might be unable to exercise an option it purchased, which would
result in substantial losses.
Price movements in Series securities will not correlate perfectly with
movements in the level of the index and therefore, a Series bears the risk that
the price of the securities may not increase as much as the level of the index.
In this event, the Series would bear a loss on the call which would not be
completely offset by movements in the prices of the securities. It is also
possible that the index may rise when the value of the Series' securities does
not. If this occurred, a Series would experience a loss on the call which would
not be offset by an increase in the value of its securities and might also
experience a loss in the market value of its securities.
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Unless a Series has other liquid assets which are sufficient to satisfy the
exercise of a call on the index, the Series will be required to liquidate
securities in order to satisfy the exercise.
When a Series has written a call on an index, there is also the risk that
the market may decline between the time the Series has the call exercised
against it, at a price which is fixed as of the closing level of the index on
the date of exercise, and the time the Series is able to sell securities. As
with options on securities, MFR or the relevant sub-adviser will not learn that
a call has been exercised until the day following the exercise date, but, unlike
a call on securities where the Series would be able to deliver the underlying
security in settlement, the Series may have to sell part of its securities in
order to make settlement in cash, and the price of such securities might decline
before they could be sold.
If a Series exercises a put option on an index which it has purchased
before final determination of the closing index value for the day, it runs the
risk that the level of the underlying index may change before closing. If this
change causes the exercised option to fall "out-of-the-money" the Series will be
required to pay the difference between the closing index value and the exercise
price of the option (multiplied by the applicable multiplier) to the assigned
writer. Although the Series may be able to minimize this risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the cutoff
time for index options may be earlier than those fixed for other types of
options and may occur before definitive closing index values are announced.
TRADING IN FUTURES CONTRACTS. Each of the Series may enter into financial
futures contracts, including stock index, interest rate and currency Futures
("Futures" or "Futures Contracts") as a hedge against changes in prevailing
levels of interest rates or currency exchange rates in order to establish more
definitely the effective return on securities or currencies held or intended to
be acquired by the Series. A Series' hedging may include sales of Futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates, and purchases of Futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Series will not enter into Futures Contracts for speculation and will
only enter into Futures Contracts which are traded on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal interest rate and currency Futures exchanges in the United States
are the Board of Trade of the City of Chicago and the Chicago Mercantile
Exchange. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission ("CFTC"). Futures are
exchanged in London at the London International Financial Futures Exchange.
Although techniques other than sales and purchases of Futures Contracts
could be used to reduce a Fund's exposure to interest rate and currency exchange
rate fluctuations, the Series may be able to hedge exposure more effectively and
at a lower cost through using Futures Contracts.
The Series will not enter into a Futures Contract if, as a result thereof,
more than 5% of the Series' total assets (taken at market value at the time of
entering into the contract) would be committed to "margin" (down payment)
deposits on such Futures Contracts.
A Futures Contract provides for the future sale by one party and purchase
by another party of a specified amount of a specific financial instrument
(security or currency) for a specified price at a designated date, time and
place. Brokerage fees are incurred when a Futures Contract is bought or sold,
and margin deposits must be maintained at all times the Futures Contract is
outstanding.
Although Futures Contracts typically require future delivery of and payment
for securities or currencies, Futures Contracts usually are closed out before
the delivery date. Closing out an open Futures Contract sale or purchase is
effected by entering into an offsetting Futures Contract purchase or sale,
respectively, for the same aggregate amount of the identical security or
currency and the same delivery date. If the offsetting purchase price is less
than the original sale price, the Series realizes a gain; if it is more, the
Series realizes a loss. Conversely, if the offsetting sale price is more than
the original purchase price, the Series realizes a gain; if it is less, the
Series realizes a loss. The transaction costs also must be included in these
calculations. There can be no assurance, however, that the Series will be able
to enter into an offsetting transaction with respect to a particular Futures
Contract at a particular time. If the Series is not able to enter into an
offsetting transaction, the Series will continue to be required to maintain the
margin deposits on the Futures Contract.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one Futures Contract of October Deutschemarks on an
exchange may be fulfilled at any time before delivery under the Futures
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Contract is required (i.e., on a specified date in October, the "delivery
month") by the purchase of another Futures Contract of October Deutschemarks on
the same exchange. In such instance, the difference between the price at which
the Futures Contract was sold and the price paid for the offsetting purchase,
after allowance for transaction costs, represents the profit or loss to the
Series.
Persons who trade in Futures Contracts may be broadly classified as
"hedgers" and "speculators." Hedgers, such as the Series, whose business
activity involves investment or other commitment in securities or other
obligations, use the Futures markets primarily to offset unfavorable changes in
value that may occur because of fluctuations in the value of the securities and
obligations held or expected to be acquired by them or fluctuations in the value
of the currency in which the securities or obligations are denominated. Debtors
and other obligors also may hedge the interest cost of their obligations. The
speculator, like the hedger, generally expects neither to deliver nor to receive
the financial instrument underlying the Futures Contract, but, unlike the
hedger, hopes to profit from fluctuations in prevailing interest rates or
currency exchange rates.
The Series' Futures transactions will be entered into primarily for
traditional hedging purposes; that is, Futures Contracts will be sold to protect
against a decline in the price of securities or currencies that the Series'
owns, or Futures Contracts will be purchased to protect the Series against an
increase in the price of securities or currencies it has committed to purchase
or expects to purchase. Stock index futures contracts may be used to provide a
hedge for a portion of the Series' portfolio, as a cash management tool, or as
an efficient way for MFR or the relevant sub-adviser to implement either an
increase or decrease in portfolio market exposure in response to changing market
conditions. Stock index futures contracts are currently traded with respect to
the S&P 500 Index and other broad stock market indices, such as the New York
Stock Exchange Composite Stock Index and the Value Line Composite Stock Index.
The Series may, however, purchase or sell futures contracts with respect to any
stock index. Nevertheless, to hedge the Series' portfolio successfully, the
Series must sell futures contracts with respect to indexes or subindexes whose
movements will have a significant correlation with movements in the prices of
the Series' securities.
"Margin" with respect to Futures Contracts is the amount of funds that must
be deposited by the Series, in a segregated account with the Series' custodian,
in order to initiate Futures trading and to maintain the Series' open positions
in Futures Contracts. A margin deposit made when the Futures Contract is entered
into ("initial margin") is intended to assure the Series' performance of the
Futures Contract. The margin required for a particular Futures Contract is set
by the exchange on which the Futures Contract is traded, and may be modified
significantly from time to time by the exchange during the term of the Futures
Contract. Futures Contracts customarily are purchased and sold on margins that
may range upward from less than 5% of the value of the Futures Contract being
traded.
If the price of an open Futures Contract changes (by increase in the case
of a sale or by decrease in the case of a purchase) so that the loss on the
Futures Contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin deposit
("margin variation"). If the value of a position increases because of favorable
price changes in the Futures Contract so that the margin deposit exceeds the
required margin, however, the broker will pay the excess to the Series. In
computing daily net asset values, the Series will mark to market the current
value of its open Futures Contracts. The Series expect to earn interest income
on margin deposits.
OPTIONS ON FUTURES CONTRACTS. Options on Futures Contracts are similar to
options on securities or currencies except that options on Futures Contracts
give the purchaser the right, in return for the premium paid, to assume a
position in a Futures Contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell the
Futures Contract, at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the Futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's Futures margin account which
represents the amount by which the market price of the Futures Contract, at
exercise, exceeds (in the case of a call) or is less than (in the case of a put)
the exercise price of the option on the Futures Contract. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the closing level of the securities, currencies
or index upon which the Futures Contracts are based on the expiration date.
Purchasers of options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.
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As an alternative to purchasing call and put options on Futures, the Series
may purchase call and put options on the underlying securities or currencies
themselves. Such options would be used in a manner identical to the use of
options on Futures Contracts.
To reduce or eliminate the leverage then employed by the Series, or to
reduce or eliminate the hedge position then currently held by the Series, the
Series may seek to close out an option position by selling an option covering
the same securities or contract and having the same exercise price and
expiration date. Trading in options on Futures Contracts began relatively
recently. The ability to establish and close out positions on such options will
be subject to the development and maintenance of a liquid secondary market. It
is not certain that this market will develop.
RISKS OF USING FUTURES CONTRACTS. The prices of Futures Contracts are
volatile and are influenced, among other things, by actual and anticipated
changes in the market and interest rates, which in turn are affected by fiscal
and monetary policies and national and international political and economic
events.
Successful use of futures contracts by the Series for hedging purposes is
subject to MFR or the relevant sub-adviser's ability to correctly predict
movements in the direction of the market. It is possible that, when the Series
has sold futures to hedge its portfolio against a decline in the market, the
index, indices, or underlying instruments on which the futures are written might
advance and the value of the underlying instruments held in the Series'
portfolio might decline. If this were to occur, the Series would lose money on
the futures and also would experience a decline in value in its underlying
instruments. However, while this might occur to a certain degree, it is believed
that over time the value of the Series' portfolio will tend to move in the same
direction as the market indices which are intended to correlate to the price
movements of the underlying instruments sought to be hedged. It is also possible
that if the Series were to hedge against the possibility of a decline in the
market (adversely affecting the underlying instruments held in its portfolio)
and prices instead increased, the Series would lose part or all of the benefit
of increased value of those underlying instruments that it has hedged, because
it would have offsetting losses in its futures positions. In addition, in such
situations, if the Series had insufficient cash, it might have to sell
underlying instruments to meet daily variation margin requirements. Such sales
of underlying instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The Series might have to sell
underlying instruments at a time when it would be disadvantageous to do so.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the Futures Contract is deposited as margin, a subsequent 10%
decrease in the value of the Futures Contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss of 150% of
the original margin deposit, if the Contract were closed out. Thus, a purchase
or sale of a Futures Contract may result in losses in excess of the amount
invested in the Futures Contract. However, the Series presumably would have
sustained comparable losses if, instead of the Futures Contract, it had invested
in the underlying security and sold it after the decline.
Furthermore, in the case of a Futures Contract purchase, in order to be
certain that the Series has sufficient assets to satisfy its obligations under a
Futures Contract, the Series sets aside and commits to back the Futures Contract
an amount of cash and liquid securities equal in value to the current value of
the underlying instrument less margin deposit.
In the case of a Futures contract sale, the Series either will set aside
amounts, as in the case of a Futures Contract purchase, own the security
underlying the contract or hold a call option permitting the Series to purchase
the same Futures Contract at a price no higher than the contract price. Assets
used as cover cannot be sold while the position in the corresponding Futures
Contract is open, unless they are replaced with similar assets. As a result, the
commitment of a significant portion of the Series' assets to cover could impede
portfolio management or the Series' ability to meet redemption requests or other
current obligations.
Most U.S. Futures exchanges limit the amount of fluctuation permitted in
Futures Contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a Futures Contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of Futures Contract,
no trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures Contract prices
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occasionally have moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of Futures
positions and subjecting some Futures traders to substantial losses.
FORWARD CURRENCY CONTRACTS AND OPTIONS ON CURRENCY. Each of the Series may
enter into forward currency contracts and related options. A forward currency
contract ("Forward Contract") is an obligation, generally arranged with a
commercial bank or other currency dealer, to purchase or sell a currency against
another currency at a future date and price as agreed upon by the parties. The
Series may accept or make delivery of the currency at the maturity of the
Forward Contract or, prior to maturity, enter into a closing transaction
involving the purchase or sale of an offsetting contract. The Series will
utilize Forward Contracts only on a covered basis. The Series engage in forward
currency transactions in anticipation of, or to protect against, fluctuations in
exchange rates. The Series might sell a particular foreign currency forward, for
example, when it holds bonds denominated in a foreign currency but anticipates,
and seeks to be protected against, a decline in the currency against the U.S.
dollar. Similarly, the Series might sell the U.S. dollar forward when it holds
bonds denominated in U.S. dollars but anticipates, and seeks to be protected
against, a decline in the U.S. dollar relative to other currencies. Further, the
Series might purchase a currency forward to "lock in" the price of securities
denominated in that currency which it anticipates purchasing.
Forward Contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A Forward Contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. The Series will enter into such
Forward Contracts with major U.S. or foreign banks and securities or currency
dealers in accordance with guidelines approved by the Fund's Board of Directors.
The Series may enter into Forward Contracts either with respect to specific
transactions or with respect to the Series' portfolio positions. The precise
matching of the Forward Contract amounts and the value of specific securities
generally will not be possible because the future value of such securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date the Forward Contract is entered into and
the date it matures. Accordingly, it may be necessary for the Series to purchase
additional foreign currency on the spot (i.e., cash) market (and bear the
expense of such purchase) if the market value of the security is less than the
amount of foreign currency the Series is obligated to deliver and if a decision
is made to sell the security and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency the Series is obligated to deliver. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain. Forward Contracts involve
the risk that anticipated currency movements will not be predicted accurately,
causing the Series to sustain losses on these Contracts and transaction costs.
Forward Contracts may be considered illiquid investments.
At or before the maturity of a Forward Contract requiring the Series to
sell a currency, the Series either may sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Series will obtain, on the same maturity date,
the same amount of the currency which it is obligated to deliver. Similarly, the
Series may close out a Forward Contract requiring it to purchase a specified
currency by entering into a second Contract entitling it to sell the same amount
of the same currency on the maturity date of the first Contract. The Series
would realize a gain or loss as a result of entering into such an offsetting
Forward Contract under either circumstance to the extent the exchange rate or
rates between the currencies involved moved between the execution dates of the
first Contract and the offsetting Contract.
The cost to the Series of engaging in Forward Contracts varies with factors
such as the currencies involved, the length of the contract period and the
market conditions then prevailing. Because Forward Contracts usually are entered
into on a principal basis, no fees or commissions are involved. The use of
Forward Contracts does not eliminate fluctuations in the prices of the
underlying securities the Series owns or intends to acquire, but it does
establish a rate of exchange in advance. In addition, while Forward Contracts
limit the risk of loss due to a decline in the value of the hedged currencies,
they also limit any potential gain that might result should the value of the
currencies increase. Although Forward Contracts presently are not regulated by
the CFTC, the CFTC, in the future, may assert authority to regulate Forward
Contracts. In that event, the Series' ability to utilize Forward Contracts in
the manner set forth above may be restricted.
INTEREST RATE AND CURRENCY SWAPS. Each of the Series may enter into
interest rate, index and currency swaps and the purchase or sale of related
caps, floors and collars. A Series usually will enter into interest rate
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swaps on a net basis if the contract so provides, that is, the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Series receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as swaps, caps, floors
and collars are entered into for good faith hedging purposes, the Series, MFR,
Lexington and SMC, as applicable, believe that they do not constitute senior
securities under the 1940 Act if appropriately covered and, thus, will not treat
them as being subject to the Series' borrowing restrictions. A Series will not
enter into any swap, cap, floor, collar or other derivative transaction unless,
at the time of entering into the transaction, the unsecured long-term debt
rating of the counterparty combined with any credit enhancements is rated at
least A by Moody's or S&P or has an equivalent rating from a nationally
recognized statistical rating organization or is determined to be of equivalent
credit quality by MFR or the relevant sub-adviser. If a counterparty defaults,
the Series may have contractual remedies pursuant to the agreements related to
the transactions. The swap market has grown substantially in recent years, with
a large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps.
EMERGING COUNTRIES. Each of the Series may invest in debt securities in
emerging markets. Investing in securities in emerging countries may entail
greater risks than investing in debt securities in developed countries. These
risks include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Series' investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; and (v) the absence of developed structures governing private or
foreign investment or allowing for judicial redress for injury to private
property.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Series. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investments by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. In addition, some countries
require governmental approval for the repatriation of investment income, capital
or the proceeds of securities sales by foreign investors. A Series could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation, as well as by the application to it of
other restrictions on investments.
CURRENCY FLUCTUATIONS. Because each of the Series, under normal
circumstances, may invest substantial portions of their total assets in the
securities of foreign issuers which are denominated in foreign currencies, the
strength or weakness of the U.S. dollar against such foreign currencies will
account for part of the Series' investment performance. A decline in the value
of any particular currency against the U.S. dollar will cause a decline in the
U.S. dollar value of the Series' holdings of securities denominated in such
currency and, therefore, will cause an overall decline in the Series' net asset
value and any net investment income and capital gains to be distributed in U.S.
dollars to shareholders of the Series.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the movement
of interest rates, the pace of business activity in certain other countries and
the U.S., and other economic and financial conditions affecting the world
economy.
Although the Series value their assets daily in terms of U.S. dollars, the
Series do not intend to convert holdings of foreign currencies into U.S. dollars
on a daily basis. The Series will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference ("spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Series at one rate, while offering a lesser rate of exchange should the Series
desire to sell that currency to the dealer.
POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S. companies
may entail additional risks due to the potential political and economic
instability of certain countries and the risks of expropriation,
nationalization,
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confiscation or the imposition of restrictions on foreign investment and on
repatriation of capital invested. In the event of such expropriation,
nationalization or other confiscation by any country, a Series could lose its
entire investment in any such country.
An investment in a Series which invests in non-U.S. companies is subject to
the political and economic risks associated with investments in foreign markets.
Even though opportunities for investment may exist in emerging markets, any
change in the leadership or policies of the governments of those countries or in
the leadership or policies of any other government which exercises a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and thereby
eliminate any investment opportunities which may currently exist.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging market countries previously
expropriated large quantities of real and personal property similar to the
property which will be represented by the securities purchased by a Series. The
claims of property owners against those governments were never finally settled.
There can be no assurance that any property represented by securities purchased
by a Series will not also be expropriated, nationalized, or otherwise
confiscated. If such confiscation were to occur, the Series could lose a
substantial portion of its investments in such countries. The Series'
investments would similarly be adversely affected by exchange control regulation
in any of those countries.
RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which a Series may
invest may have vocal minorities that advocate radical religious or
revolutionary philosophies or support ethnic independence. Any disturbance on
the part of such individuals could carry the potential for wide-spread
destruction or confiscation of property owned by individuals and entities
foreign to such country and could cause the loss of the Series' investment in
those countries.
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION.
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most of the foreign securities held by a Series will not
be registered with the SEC or regulators of any foreign country, nor will the
issuers thereof be subject to the SEC's reporting requirements. Thus, there will
be less available information concerning foreign issuers of securities held by
the Series than is available concerning U.S. issuers. In instances where the
financial statements of an issuer are not deemed to reflect accurately the
financial situation of the issuer, MFR or the relevant sub-adviser will take
appropriate steps to evaluate the proposed investment, which may include on-site
inspection of the issuer, interviews with its management and consultations with
accountants, bankers and other specialists. There is substantially less publicly
available information about foreign companies than there are reports and ratings
published about U.S. companies and the U.S. Government. In addition, where
public information is available, it may be less reliable than such information
regarding U.S. issuers.
ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be
less liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers generally are
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions usually are subject to fixed
commissions, which generally are higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Series
are uninvested and no return is earned thereon. The inability of the Series to
make intended security purchases due to settlement problems could cause it to
miss attractive opportunities. Inability to dispose of a portfolio security due
to settlement problems either could result in losses to the Series due to
subsequent declines in value of the portfolio security or, if the Series has
entered into a contract to sell the security, could result in possible liability
to the purchaser. MFR and the relevant sub-adviser will consider such
difficulties when determining the allocation of the Series' assets.
NON-U.S. WITHHOLDING TAXES. A Series' investment income and gains from
foreign issuers may be subject to non-U.S. withholding and other taxes, thereby
reducing the Series' investment income and gains.
COSTS. Investors should understand that the expense ratio of each Series
can be expected to be higher than investment companies investing in domestic
securities since the cost of maintaining the custody of foreign securities and
the rate of advisory fees paid by the Series are higher.
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EASTERN EUROPE. Changes occurring in Eastern Europe and Russia today could
have long-term potential consequences. As restrictions fail, this could result
in rising standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment in the countries
of Eastern Europe and Russia is highly speculative at this time. Political and
economic reforms are too recent to establish a definite trend away from
centrally-planned economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or formal market for
securities. Such countries may also have government exchange controls,
currencies with no recognizable market value relative to the established
currencies of western market economies, little or no experience in trading in
securities, no financial reporting standards, a lack of a banking and securities
infrastructure to handle such trading, and a legal tradition which does not
recognize rights in private property. In addition, these countries may have
national policies which restrict investments in companies deemed sensitive to
the country's national interest. Further, the governments in such countries may
require governmental or quasi-governmental authorities to act as custodian of
the Fund's assets invested in such countries and these authorities may not
qualify as a foreign custodian under the Investment Company Act of 1940 and
exemptive relief from such Act may be required. All of these considerations are
among the factors which could cause significant risks and uncertainties with
respect to investment in Eastern Europe and Russia.
AMERICAN DEPOSITARY RECEIPTS (ADRS). Each of the Series may invest in ADRs.
ADRs are dollar-denominated receipts issued generally by U.S. banks and which
represent the deposit with the bank of a foreign company's securities. ADRs are
publicly traded on exchanges or over-the-counter in the United States. Investors
should consider carefully the substantial risks involved in investing in
securities issued by companies of foreign nations, which are in addition to the
usual risks inherent in domestic investments. See "Foreign Investment
Restrictions," above.
INVESTMENT POLICY LIMITATIONS
Each of the Series operates within certain fundamental investment policy
limitations. These limitations may not be changed for the Series without
approval of the lesser of (i) 67% or more of the voting securities present at a
meeting if the holders of more than 50% of the outstanding voting securities of
that Series are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of that Series.
The fundamental investment policies of the Series are:
1. Not to invest in the securities of an issuer if the officers and directors
of the Fund, Underwriter or Investment Adviser own more than 1/2 of 1% of
such securities or if all such persons together own more than 5% of such
securities.
2. Not to invest more than 5% of its assets in the securities of any one
issuer (other than securities of the U.S. Government, its agencies or
instrumentalities); provided, however, that this limitation applies only
with respect to 75% of the value of the Series' total assets.
3. Not to purchase more than 10% of the outstanding voting securities (or of
any class of outstanding securities) of any one issuer (other than
securities of the U.S. Government, its agencies or instrumentalities).
4. Not to invest in companies for the purpose of exercising control of
management.
5. Not to act as underwriter of securities of other issuers.
6. Not to invest in an amount equal to, or in excess of, 25% of its total
assets in any particular industry (other than securities of the U.S.
Government, its agencies or instrumentalities).
7. Not to purchase or sell real estate. (This policy shall not prevent the
Series from investing in securities or other instruments backed by real
estate or in securities of companies engaged in the real estate business.)
8. Not to buy or sell commodities or commodity contracts; provided, however,
that the Series may, to the extent appropriate under their investment
programs, purchase securities of companies engaged in such activities, may
enter into transactions in financial futures contracts and related options
for hedging purposes, may engage in transactions on a when-issued or
forward commitment basis and may enter into forward currency contracts.
9. Not to make loans to other persons other than for the purchase of publicly
distributed debt securities and U.S. Government obligations or by entry
into repurchase agreements; provided, however, that Emerging Markets Total
Return and Global Asset Allocation Series may make loans consistent with
the 1940 Act.
23
<PAGE>
10. Not to invest in limited partnerships or similar interests in oil, gas,
mineral lease, mineral exploration or development programs; provided,
however, that the Series may invest in the securities of other corporations
whose activities include such exploration and development.
11. With respect to the Global High Yield Series, not to borrow money, except
that the Series may (a) enter into certain futures contracts and options
related thereto; (b) enter into commitments to purchase securities in
accordance with the Series' investment program, including delayed delivery
and when-issued securities and reverse repurchase agreements, and (c) for
temporary emergency purposes, borrow money in amounts not exceeding 5% of
the value of its total assets at the time the loan is made. The Emerging
Markets Total Return and Global Asset Allocation Series may borrow in
amounts not exceeding 33 1/3% of the value of total assets at the time the
loan is made.
12. With respect to Global High Yield Series, not to purchase securities of any
other investment company; provided, however that it may purchase securities
of another investment company or investment trust, if purchased in the open
market and then only if no profit, other than the customary broker's
commission, results to a sponsor or dealer, or by merger or other
reorganization.
13. With respect to Global High Yield Series not to issue senior securities (as
defined in the 1940 Act) except as follows: (a) the Series may enter into
commitments to purchase securities in accordance with the Series'
investment program, including reverse repurchase agreements, delayed
delivery and when-issued securities, which may be considered the issuance
of senior securities to the extent permitted under applicable regulations;
(b) the Series may engage in transactions that may result in the issuance
of a senior security to the extent permitted under applicable regulations,
the interpretation of the 1940 Act or an exemptive order; (c) the Series
may engage in short sales of securities to the extent permitted in its
investment program and other restrictions; (d) the purchase or sale of
futures contracts and related options shall not be considered to involve
the issuance of senior securities; and (e) subject to fundamental
restrictions, the Series may borrow money as authorized by the 1940 Act.
The Emerging Markets Total Return and Global Asset Allocation Series may
issue senior securities in compliance with the 1940 Act.
14. With respect to Global High Yield Series, not to invest more than 15% of
its total assets in illiquid securities.
The Global High Yield Series will not purchase securities on margin except
as provided below. The following investment policy of Global High Yield Series
is not a fundamental policy and may be changed by a vote of a majority of the
Fund's Board of Directors without shareholder approval. Global High Yield Series
may purchase and sell futures contracts and related options under the following
conditions: (a) the then current aggregate futures market prices of financial
instruments required to be delivered and purchased under open futures contracts
shall not exceed 30% of the Series' total assets, at market value; and (b) no
more than 5% of the Series' total assets, at market value at the time of
entering into a contract, shall be committed to margin deposits in relation to
futures contracts.
The above limitations, other than those relating to borrowing, are
applicable at the time of investment, and later increases or decreases in
percentages resulting from changes in value of net assets will not result in
violation of such limitations. The Series interpret Fundamental Policy (7) to
prohibit the purchase of real estate limited partnerships.
OFFICERS AND DIRECTORS
The officers and directors of the Fund and their principal occupations for
at least the last five years are as follows. Unless otherwise noted, the address
of each officer and director is 700 Harrison Street, Topeka, Kansas 66636-0001.
<TABLE>
<CAPTION>
- --------------------------------------------------------------- -------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------- -------------------------------------------------------------
<S> <C>
JOHN D. CLELAND,* President and Director Senior Vice President and Managing Member Representative,
Security Management Company, LLC; Senior Vice President,
Security Benefit Group, Inc. and Security Benefit Life
Insurance Company.
- --------------------------------------------------------------- -------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------- -------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------- -------------------------------------------------------------
DONALD A. CHUBB, JR.,** Director Business broker, Griffith & Blair Realtors. Prior to 1997,
2222 SW 29th Street President, Neon Tube Light Company, Inc.
Topeka, Kansas 66611
DONALD L. HARDESTY, Director President, Central Research Corporation.
900 Bank IV Tower
Topeka, Kansas 66603
PENNY A. LUMPKIN,** Director Vice President, Palmer News, Inc. Prior to October 1991,
3616 Canterbury Town Road Secretary and Director, Palmer Companies, Inc. (Wholesale
Topeka, Kansas 66610 Periodicals).
MARK L. MORRIS, JR.,** Director President, Mark Morris Associates (Veterinary Research and
5500 SW 7th Street Education).
Topeka, Kansas 66606
JEFFREY B. PANTAGES,* Director Senior Vice President, Security Benefit Group, Inc. and
1266 South Street Security Benefit Life Insurance Company. Prior to June
Needham, MA 02192 1996, President, Chief Investment Officer and Director,
Security Management Company. Prior to April 1992, Managing
Director, Prudential Life.
HUGH L. THOMPSON, Director President, Washburn University.
1700 College
Topeka, KS 66621
JAMES R. SCHMANK, Vice President and Treasurer President (Interim), Treasurer, Chief Fiscal Officer and
Managing Member Representative, Security Management
Company, LLC; Vice President and Interim Chief Investment
Officer, Security Benefit Group, Inc. and Security Benefit
Life Insurance Company.
MARK E. YOUNG, Vice President Vice President, Security Management Company, LLC; Assistant
Vice President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
JANE A. TEDDER, Vice President Vice President and Senior Portfolio Manager, Security
Management Company, LLC; Vice President, Security Benefit
Group, Inc. and Security Benefit Life Insurance Company.
AMY J. LEE, Secretary Secretary, Security Management Company, LLC; Vice
President, Associate General Counsel and Assistant
Secretary, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
BRENDA M. HARWOOD, Assistant Treasurer and Assistant Vice President, Assistant Treasurer and Assistant
Assistant Secretary Secretary, Security Management Company, LLC; Assistant Vice
President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
STEVEN M. BOWSER, Assistant Vice President Assistant Vice President and Portfolio Manager, Security
Management Company, LLC; Assistant Vice President, Security
Benefit Group, Inc. and Security Benefit Life Insurance
Company. Prior to October 1992, Assistant Vice President
and Portfolio Manager, Federal Home Loan Bank.
GREGORY A. HAMILTON, Assistant Vice President Second Vice President, Security Management Company, LLC,
Security Benefit Group, Inc. and Security Benefit Life
Insurance Company. Prior to December 1992, First Vice
President and Manager of Investments Division, Mercantile
National Bank.
- --------------------------------------------------------------- -------------------------------------------------------------
25
<PAGE>
- --------------------------------------------------------------- -------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------- -------------------------------------------------------------
CHRISTOPHER D. SWICKARD, Assistant Secretary Assistant Vice President and Assistant Counsel, Security
Benefit Group, Inc. and Security Benefit Life Insurance
Company. Prior to June 1992, student at Washburn
University School of Law.
- -----------------------------------------------------------------------------------------------------------------------------
*These directors are deemed to be "interested persons" of the Fund under the Investment Company Act of 1940, as amended.
**These directors serve on the Fund's audit committee, the purpose of which is to meet with the independent auditors, to
review the work of the auditors, and to oversee the handling by Security Management Company, LLC of the accounting
functions for the Series.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The officers of the Fund hold identical offices with each of the funds in
the Security Funds' complex, which consists of Security Equity, Security Ultra,
Security Growth and Income, Security Tax-Exempt, Security Cash and SBL Funds,
except Mr. Bowser and Mr. Hamilton who is also Assistant Vice President of SBL
Fund and Security Equity Fund. The directors of the Fund also serve as directors
of the Funds in the Security Funds' complex. See the table under "Investment
Management," page 32, for positions held by such persons with SMC. Mr. Young and
Ms. Lee hold identical offices for the Distributor (Security Distributors,
Inc.). Messrs. Cleland and Schmank are also directors and Vice Presidents of the
Distributor and Ms. Harwood is Treasurer of the Distributor.
REMUNERATION OF DIRECTORS AND OTHERS
The Fund directors, except those directors who are "interested persons" of
the Fund, receive from the Fund an annual retainer of $1,042 and a fee of $133
per meeting, plus reasonable travel costs, for each meeting of the board
attended. Each of the seven Series of the Fund paid a pro rata portion of the
directors' fees based on the amount of its net assets. Certain directors who are
members of the Fund's audit committee receive a fee of $100 per hour and
reasonable travel costs for each meeting of the audit committee attended.
The Fund does not pay any fees to, or reimburse expenses of, directors who
are considered "interested persons" of the Fund. The aggregate compensation paid
by the Fund to each of the directors during the fiscal year ended December 31,
1996, and the aggregate compensation paid to each of the directors during
calendar year 1996 by all seven of the registered investment companies in the
"Security Fund Complex," are set forth in the accompanying chart. Each of the
directors is a director of each of the other registered investment companies in
the Security Fund Complex.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL COMPENSATION
NAME OF PENSION OR RETIREMENT FROM THE SECURITY
DIRECTOR OF AGGREGATE COMPENSATION BENEFITS ACCRUED AS ESTIMATED ANNUAL FUND COMPLEX,
THE FUND FROM THE FUND PART OF FUND EXPENSES BENEFITS UPON RETIREMENT INCLUDING THE FUND
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Willis A. Anton, Jr. $1,542 $0 $0 $18,500
Donald A. Chubb, Jr. 1,571 0 0 18,900
John D. Cleland 0 0 0 0
Donald L. Hardesty 1,542 0 0 18,500
Penny A. Lumpkin 1,571 0 0 18,900
Mark L. Morris, Jr. 1,571 0 0 18,900
Jeffrey B. Pantages 0 0 0 0
Harold G. Worswick* 0 0 0 6,450
Hugh L. Thompson 1,181 0 0 14,175
- ----------------------------------------------------------------------------------------------------------------------------
*The Fund has accrued deferred compensation in the amount of $537 for Mr. Worswick as of December 31, 1996.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
On March 31, 1997, the Fund's officers and directors (as a group) did not
own shares of the Series.
HOW TO PURCHASE SHARES
As discussed below, shares of the Series may be purchased with either a
front-end or contingent deferred sales charge. Each of the Series reserves the
right to withdraw all or any part of the offering made by this prospectus and to
reject purchase orders.
As a convenience to investors and to save operating expenses, the Series do
not issue certificates for Series shares except upon written request by the
stockholder.
26
<PAGE>
Security Distributors, Inc. (the "Distributor"), 700 SW Harrison, Topeka,
Kansas, a wholly-owned subsidiary of Security Benefit Group, Inc., is principal
underwriter for the Series. Investors may purchase shares of the Series through
authorized dealers who are members of the National Association of Securities
Dealers, Inc. In addition, banks and other financial institutions may make
shares of the Series available to their customers. (Banks and other financial
institutions that make shares of the Series available to their customers in
Texas must be registered with that state as securities dealers.) The minimum
initial purchase must be $100 and subsequent purchases must be $100 unless made
through an Accumulation Plan which allows a minimum initial purchase of $100 and
subsequent purchases of $20. (See "Accumulation Plan," page 31.) An application
may be obtained from the Distributor.
Orders for the purchase of shares of the Series will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by the Distributor (generally as of the
close of the Exchange on that day) plus the sales charge in the case of Class A
shares of the Series. Orders received by dealers or other firms prior to the
close of the Exchange and received by the Distributor prior to the close of its
business day will be confirmed at the offering price effective as of the close
of the Exchange on that day. Dealers and other financial services firms are
obligated to transmit orders promptly.
ALTERNATIVE PURCHASE OPTIONS
The Series offers two classes of shares:
CLASS A SHARES - FRONT-END LOAD OPTION. Class A shares are sold with a
sales charge at the time of purchase. Class A shares are not subject to a sales
charge when they are redeemed (except that shares sold in an amount of
$1,000,000 or more without a front-end sales charge will be subject to a
contingent deferred sales charge of 1% for one year). See Appendix A for a
discussion of "Rights of Accumulation" and "Statement of Intention," which
options may serve to reduce the front-end sales charge.
CLASS B SHARES - BACK-END LOAD OPTION. Class B shares are sold without a
sales charge at the time of purchase, but are subject to a deferred sales charge
if they are redeemed within five years of the date of purchase. Class B shares
will automatically convert tax-free to Class A shares at the end of eight years
after purchase.
The decision as to which class is more beneficial to an investor depends on
the amount and intended length of the investment. Investors who would rather pay
the entire cost of distribution at the time of investment, rather than spreading
such cost over time, might consider Class A shares. Other investors might
consider Class B shares, in which case 100% of the purchase price is invested
immediately, depending on the amount of the purchase and the intended length of
investment. The Series will not normally accept any purchase of Class B shares
in the amount of $250,000 or more.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell.
CLASS A SHARES
Class A shares of the Series are offered at net asset value plus an initial
sales charge as follows:
- --------------------------------------------------------------------------------
SALES CHARGE
----------------------------------------------
PERCENTAGE
APPLICABLE OF NET PERCENTAGE
AMOUNT OF PURCHASE PERCENTAGE OF AMOUNT REALLOWABLE
AT OFFERING PRICE OFFERING PRICE INVESTED TO DEALERS
- --------------------------------------------------------------------------------
Less than $50,000................. 4.75% 4.99% 4.00%
$50,000 but less than $100,000.... 3.75 3.90 3.00
$100,000 but less than $250,000... 2.75 2.83 2.20
$250,000 but less than $1,000,000. 1.75 1.78 1.40
$1,000,000 or more................ None None (See below)
- --------------------------------------------------------------------------------
Purchases of Class A shares of the Series in amounts of $1,000,000 or more
are at net asset value (without a sales charge), but are subject to a contingent
deferred sales charge of 1% in the event of redemption within one year following
purchase. For a discussion of the contingent deferred sales charge, see
"Calculation and Waiver of Contingent Deferred Sales Charges" page 30. The
Distributor will pay a commission to dealers on purchases of
27
<PAGE>
$1,000,000 or more as follows: 1.00% on sales up to $5,000,000, plus .50% on
sales of $5,000,000 or more up to $10,000,000, and .10% on any amount of
$10,000,000 or more.
CLASS A DISTRIBUTION PLAN
As discussed in the prospectus, each of the Series has a Distribution Plan
for its Class A shares pursuant to Rule 12b-1 under the Investment Company Act
of 1940. The Plan authorizes the Series to pay an annual fee to the Distributor
equal to .25% of the average daily net asset value of the Class A shares of each
Series to finance various activities relating to the distribution of such shares
to investors. These expenses include, but are not limited to, the payment of
compensation (including compensation to securities dealers and other financial
institutions and organizations) to obtain various administrative services for
each Series. These services include, among other things, processing new
shareholder account applications and serving as the primary source of
information to customers in answering questions concerning each Series and their
transactions with the Series. The Distributor is also authorized to engage in
advertising, the preparation and distribution of sales literature and other
promotional activities on behalf of each Series. The Distributor is required to
report in writing to the Board of Directors of the Fund and the board will
review at least quarterly the amounts and purpose of any payments made under the
Plan. The Distributor is also required to furnish the board with such other
information as may reasonably be requested in order to enable the board to make
an informed determination of whether the Plan should be continued.
The Plan became effective with respect to Global High Yield Series on June
1, 1995, and the other Series on May 1, 1997, and was renewed by the directors
of the Fund with respect to Global High Yield Series on February 7, 1997. The
Plan will continue from year to year, provided that such continuance is approved
at least annually by a vote of a majority of the Board of Directors of the Fund,
including a majority of the independent directors cast in person at a meeting
called for the purpose of voting on such continuance. The Plan may be terminated
at any time on 60 days' written notice, without penalty, if a majority of the
disinterested directors or the Class A shareholders of a Series vote to
terminate the Plan. Any agreement relating to the implementation of the Plan
terminates automatically if it is assigned. The Plan may not be amended to
increase materially the amount of payments thereunder without approval of the
Class A shareholders of the Series.
Because all amounts paid pursuant to the Distribution Plan are paid to the
Distributor, SMC and its officers, directors and employees, including Messrs.
Cleland and Pantages (directors of the Fund), Messrs. Young, Schmank, Hamilton,
Bowser and Swickard, Ms. Lee and Ms. Harwood (officers of the Fund), all may be
deemed to have a direct or indirect financial interest in the operation of the
Distribution Plan. None of the independent directors have a direct or indirect
financial interest in the operation of the Distribution Plan.
Benefits from the Distribution Plan may accrue to the Series and their
stockholders from the growth in assets due to sales of shares to the public
pursuant to the Distribution Agreement with the Distributor. Increases in the
Series' net assets from sales pursuant to its Distribution Plan and Agreement
may benefit shareholders by reducing per share expenses, permitting increased
investment flexibility and diversification of the Series' assets, and
facilitating economies of scale (e.g., block purchases) in the Series'
securities transactions.
Distribution fees paid by Class A stockholders of the Global High Yield
Series to the Distributor under the Plan for the year ended December 31, 1996,
totaled $7,921. Approximately $7,721 of this amount was paid as a service fee to
broker/dealers and $200 was spent on promotions. The amount spent on promotions
consists primarily of amounts reimbursed to dealers for expenses (primarily
travel, meals and lodging) incurred in connection with attendance by their
representatives at educational meetings concerning the Series. The Distributor
may engage the services of an affiliated advertising agency for advertising,
preparation of sales literature and other distribution-related activities.
CLASS B SHARES
Class B shares of the Series are offered at net asset value, without an
initial sales charge. With certain exceptions, these Series may impose a
deferred sales charge on shares redeemed within five years of the date of
purchase. No deferred sales charge is imposed on amounts redeemed thereafter. If
imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable to the stockholder. The deferred sales charge is retained by
the Distributor.
28
<PAGE>
Whether a contingent deferred sales charge is imposed and the amount of the
charge will depend on the number of years since the stockholder made a purchase
payment from which an amount is being redeemed, according to the following
schedule:
YEAR SINCE PURCHASE PAYMENT WAS MADE CONTINGENT DEFERRED SALES CHARGE
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and Following 0%
Class B shares (except shares purchased through the reinvestment of
dividends and other distributions with respect to Class B shares) will
automatically convert on the eighth anniversary of the date such shares were
purchased to Class A shares which are subject to a lower distribution fee. This
automatic conversion of Class B shares will take place without imposition of a
front-end sales charge or exchange fee. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to SMC.) All shares purchased through reinvestment of dividends and
other distributions with respect to Class B shares ("reinvestment shares") will
be considered to be held in a separate subaccount. Each time any Class B shares
(other than those held in the subaccount) convert to Class A shares, a pro rata
portion of the reinvestment shares held in the subaccount will also convert to
Class A shares. Class B shares so converted will no longer be subject to the
higher expenses borne by Class B shares. Because the net asset value per share
of the Class A shares may be higher or lower than that of the Class B shares at
the time of conversion, although the dollar value will be the same, a
shareholder may receive more or less Class A shares than the number of Class B
shares converted. Under current law, it is the Fund's opinion that such a
conversion will not constitute a taxable event under federal income tax law. In
the event that this ceases to be the case, the Board of Directors will consider
what action, if any, is appropriate and in the best interests of the Class B
stockholders.
CLASS B DISTRIBUTION PLAN
Each of the Series bears some of the costs of selling its Class B shares
under a Distribution Plan adopted with respect to its Class B shares ("Class B
Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("1940 Act"). This Plan was adopted by the Board of Directors of the Fund
with respect to Global High Yield Series on February 3, 1995, and with respect
to the Emerging Markets Total Return and Global Asset Allocation Series, on
February 7, 1997. The Plan was renewed with respect to Global High Yield Series
on February 7, 1997. The Plan provides for payments at an annual rate of 1.00%
of the average daily net asset value of Class B shares. Amounts paid by the
Series are currently used to pay dealers and other firms that make Class B
shares available to their customers (1) a commission at the time of purchase
normally equal to 4.00% of the value of each share sold and (2) a service fee
payable for each year after the first, quarterly, in an amount equal to .25%
annually of the average daily net asset value of Class B shares sold by such
dealers and other firms and remaining outstanding on the books of the Series.
Rules of the National Association of Securities Dealers, Inc. ("NASD")
limit the aggregate amount that each Series may pay annually in distribution
costs for the sale of its Class B shares to 6.25% of gross sales of Class B
shares since the inception of the Distribution Plan, plus interest at the prime
rate plus 1% on such amount (less any contingent deferred sales charges paid by
Class B shareholders to the Distributor). The Distributor intends, but is not
obligated, to continue to pay or accrue distribution charges incurred in
connection with the Class B Distribution Plan which exceed current annual
payments permitted to be received by the Distributor from the Series. The
Distributor intends to seek full payment of such charges from the Series
(together with annual interest thereon at the prime rate plus 1%) at such time
in the future as, and to the extent that, payment thereof by the Series would be
within permitted limits.
Each Series' Class B Distribution Plan may be terminated at any time with
respect to any Series by vote of the directors who are not interested persons of
the Fund as defined in the 1940 Act or by vote of a majority of the outstanding
Class B shares of the Series. In the event the Class B Distribution Plan is
terminated by the Class B stockholders or the Fund's Board of Directors, the
payments made to the Distributor pursuant to the Plan up to
29
<PAGE>
that time would be retained by the Distributor. Any expenses incurred by the
Distributor in excess of those payments would be absorbed by the Distributor.
Distribution fees paid by Class B stockholders of Global High Yield Series to
the Distributor under the Plan for the year ended December 31, 1996, totaled
$15,035. The Series make no payments in connection with the sales of their Class
B shares other than the distribution fee paid to the Distributor.
CALCULATION AND WAIVER OF CONTINGENT DEFERRED SALES CHARGES
Any contingent deferred sales charge imposed upon redemption of Class A
shares (purchased in an amount of $1,000,000 or more) and Class B shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. No contingent deferred sales charge is imposed
upon redemption of amounts derived from (1) increases in the value above the net
cost of such shares due to increases in the net asset value per share of the
Series; (2) shares acquired through reinvestment of income dividends and capital
gain distributions; or (3) Class A shares (purchased in an amount of $1,000,000
or more) held for more than one year or Class B shares held for more than five
years. Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed.
The contingent deferred sales charge is waived: (1) following the death of
a stockholder if redemption is made within one year after death, (2) upon the
disability (as defined in Section 72(m)(7) of the Internal Revenue Code) of a
stockholder prior to age 65 if redemption is made within one year after the
disability, provided such disability occurred after the stockholder opened the
account; (3) in connection with required minimum distributions in the case of an
IRA, SAR-SEP or Keogh or any other retirement plan qualified under Section
401(a), 401(k) or 403(b) of the Code; and (4) in the case of distributions from
retirement plans qualified under Section 401(a) or 401(k) of the Internal
Revenue Code due to (i) returns of excess contributions to the plan, (ii)
retirement of a participant in the plan, (iii) a loan from the plan (repayment
of loans, however, will constitute new sales for purposes of assessing the
CDSC), (iv) "financial hardship" of a participant in the plan, as that term is
defined in Treasury Regulation Section 1.401(k)-1(d)(2), as amended from time to
time, (v) termination of employment of a participant in the plan, (vi) any other
permissible withdrawal under the terms of the plan. The contingent deferred
sales charge also may be waived in the case of certain redemptions of shares of
the Series pursuant to a Systematic Withdrawal Program (refer to page 31 for
details).
ARRANGEMENTS WITH BROKER/DEALERS AND OTHERS
The Distributor, from time to time, may provide promotional incentives or
pay a bonus to certain dealers whose representatives have sold or are expected
to sell significant amounts of the Series. Such promotional incentives may
include payment for attendance (including travel and lodging expenses) by
qualifying registered representatives (and members of their families) to sales
seminars at luxury resorts within or without the United States. Bonus
compensation may include reallowance of the entire sales charge and also may
include, with respect to Class A shares, an amount which exceeds the entire
sales charge and, with respect to Class B shares, an amount which exceeds the
maximum commission. The Distributor also may provide financial assistance to
certain dealers in connection with conferences, sales or training programs for
their employees, seminars for the public, advertising, sales campaigns, and/or
shareholder services and programs regarding one or more of the Series. Certain
of the promotional incentives or bonuses may be financed by payments to the
Distributor under a Rule 12b-1 Distribution Plan. The payment of promotional
incentives and/or bonuses will not change the price an investor will pay for
shares or the amount that the Series will receive from such sale. No
compensation will be offered to the extent it is prohibited by the laws of any
state or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. ("NASD"). A Dealer to whom substantially the entire sales charge
of Class A shares is reallowed may be deemed to be an "underwriter" under
federal securities laws.
The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the Series for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above. Banks currently are prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Fund's Board of Directors would consider what
action, if any, would be appropriate.
30
<PAGE>
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
PURCHASES AT NET ASSET VALUE
Class A shares of the Series may be purchased at net asset value by (1)
directors, officers and employees of the Funds, MFR (and its affiliates) or the
Distributor; directors, officers and employees of Security Benefit Life
Insurance Company and its subsidiaries; agents licensed with Security Benefit
Life Insurance Company; spouses or minor children of any such agents; as well as
the following relatives of any such directors, officers and employees (and their
spouses): spouses, grandparents, parents, children, grandchildren, siblings,
nieces and nephews; (2) any trust, pension, profit sharing or other benefit plan
established by any of the foregoing corporations for persons described above;
(3) retirement plans where third party administrators of such plans have entered
into certain arrangements with the Distributor or its affiliates provided that
no commission is paid to dealers; and (4) officers, directors, partners or
registered representatives (and their spouses and minor children) of
broker/dealers who have a selling agreement with the Distributor.
Life agents and associated personnel of broker/dealers must obtain a
special application from their employer or from the Distributor, in order to
qualify for such purchases.
Class A shares of the Series also may be purchased at net asset value when
the purchase is made on the recommendation of (i) a registered investment
adviser, trustee or financial intermediary who has authority to make investment
decisions on behalf of the investor; or (ii) a certified financial planner or
registered broker-dealer who either charges periodic fees to its customers for
financial planning, investment advisory or asset management services, or
provides such services in connection with the establishment of an investment
account for which a comprehensive "wrap fee" is imposed. The Distributor must be
notified when a purchase is made that qualifies under this provision.
ACCUMULATION PLAN
Investors in the Series may purchase shares on a periodic basis under an
Accumulation Plan which provides for an initial investment of $100 minimum, and
subsequent investments of $20 minimum at any time. An Accumulation Plan is a
voluntary program, involving no obligation to make periodic investments, and is
terminable at will. Payments are made by sending a check to the Distributor who
(acting as an agent for the dealer) will purchase whole and fractional shares of
the Series as of the close of business on the day such payment is received. A
confirmation and statement of account will be sent to the investor following
each investment. Certificates for whole shares will be issued upon request. No
certificates will be issued for fractional shares which may be withdrawn only by
redemption for cash.
Investors may choose to use "Secur-O-Matic" (automatic bank draft) to make
their Series purchases. There is no additional charge for using Secur-O-Matic.
An application may be obtained from the Series.
SYSTEMATIC WITHDRAWAL PROGRAM
A Systematic Withdrawal Program may be established by stockholders who wish
to receive regular monthly, quarterly, semiannual or annual payments of $25 or
more. A Program may also be based upon the liquidation of a fixed or variable
number of shares provided that the minimum amount is withdrawn. However, the
Fund does not recommend this (or any other amount) as an appropriate withdrawal.
Shares with a current offering price of $5,000 or more must be deposited with
SMC acting as agent for the stockholder under the Program. There is no service
charge on the Program as SMC pays the costs involved.
Sufficient shares will be liquidated at net asset value to meet the
specified withdrawals. Liquidation of shares may deplete or possibly use up the
investment, particularly in the event of a market decline. Payments cannot be
considered as actual yield or income since part of such payments is a return of
capital and may constitute a taxable event to the stockholder. The maintenance
of a Withdrawal Program concurrently with purchases of additional shares of the
Series would be disadvantageous because of the sales commission payable in
respect to such purchases. During the withdrawal period, no payments will be
accepted under an Accumulation Plan. Income dividends and capital gains
distributions are automatically reinvested at net asset value. If an investor
has an Accumulation Plan in effect, it must be terminated before a Systematic
Withdrawal Program may be initiated.
31
<PAGE>
The stockholder receives confirmation of each transaction showing the
source of the payment and the share balance remaining in the Program. A Program
may be terminated on written notice by the stockholder or the Fund, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account.
A stockholder may establish a Systematic Withdrawal Program with respect to
Class B shares without the imposition of any applicable contingent deferred
sales charge, provided that such withdrawals do not in any 12-month period,
beginning on the date the Program is established, exceed 10% of the value of the
account on that date ("Free Systematic Withdrawals"). Free Systematic
Withdrawals are not available if a Program established with respect to Class B
shares provides for withdrawals in excess of 10% of the value of the account in
any Program year and, as a result, all withdrawals under such a Program are
subject to any applicable contingent deferred sales charge. Free Systematic
Withdrawals will be made first by redeeming those shares that are not subject to
the contingent deferred sales charge and then by redeeming shares held the
longest. The contingent deferred sales charge applicable to a redemption of
Class B shares requested while Free Systematic Withdrawals are being made will
be calculated as described under "Calculation and Waiver of Contingent Deferred
Sales Charges," page 30. A Systematic Withdrawal form may be obtained from the
Fund.
INVESTMENT MANAGEMENT
MFR Advisors, Inc. ("MFR"), One Liberty Plaza, New York, New York 10006,
has served as investment adviser to the Series since May 1, 1997 (date of
inception of Emerging Markets Total Return and Global Asset Allocation Series).
Prior to that date, MFR served as a sub-adviser to the Global High Yield Series
and SMC served as investment adviser. The current Investment Advisory Contract
for the Series is dated April 28, 1997 and was approved by the Fund's Board of
Directors at a regular meeting held February 7, 1997. MFR is a subsidiary of
Maria Fiorini Ramirez, Inc. ("Ramirez") which was established in August of 1992
to provide global economic consulting, investment advisory and broker-dealer
services. Ramirez owns 100% of the outstanding common stock of MFR. Maria
Fiorini Ramirez owns 100% of the outstanding capital stock of Ramirez. MFR
currently acts as sub-adviser to the Lexington Ramirez Global Income Fund and
SBL Fund, Global Aggressive Bond Series and also serves as an institutional
manager for private clients.
Pursuant to the Investment Advisory Contract, MFR furnishes investment
advisory, statistical and research services to the Series, supervises and
arranges for the purchase and sale of securities on behalf of the Series,
provides for the maintenance and compilation of records pertaining to the
investment advisory functions, and makes certain guarantees with respect to the
Series' annual expenses. MFR guarantees that the aggregate annual expenses of
the respective Series (including for any fiscal year, the management fee, but
excluding interest, taxes, brokerage commissions, extraordinary expenses and
Class B distribution fees) shall not exceed the level of expenses which the
Series is permitted to bear under the most restrictive expense limitation
imposed by any state in which shares of the Series are then qualified for sale.
(MFR is not aware of any state that currently imposes limits on the level of
mutual fund expenses.) MFR will contribute such funds or waive such portion of
its management fee as may be necessary to insure that the aggregate expenses of
the Series do not exceed the guaranteed maximum.
MFR has retained Lexington Management Corporation ("Lexington") to furnish
certain advisory services to the Series pursuant to a Sub-Advisory Agreement,
effective May 1, 1997. Pursuant to this agreement, Lexington furnishes
investment advisory, statistical and research facilities, supervises and
arranges for the purchase and sale of securities on behalf of the Series and
provides for the compilation and maintenance of records pertaining to such
investment advisory services, subject to the control and supervision of the
Board of Directors of the Fund, and MFR. For such services, MFR pays Lexington
an amount equal to .20% of the average net assets of the Series, computed on a
daily basis and payable monthly. The Sub-Advisory Agreement may be terminated
without penalty at any time by either party on 60 days' written notice and is
automatically terminated in the event of its assignment or in the event that the
Investment Advisory Contract between MFR and the Fund is terminated, assigned or
not renewed.
Lexington is a wholly-owned subsidiary of Lexington Global Asset Managers,
Inc., a Delaware corporation with offices at Park 80 West Plaza Two, Saddle
Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their spouses,
trusts and other related entities have a majority voting control of the
outstanding shares of Lexington Global Asset Managers, Inc. Lexington was
established in 1938 and currently manages over $3.8 billion in assets.
32
<PAGE>
MFR has entered into a Sub-Advisory Agreement with Security Management
Company, LLC ("SMC"), 700 SW Harrison Street, Topeka, Kansas 66636-0001, to
provide investment advisory services with respect to the Global Asset Allocation
Series' investments in domestic equities, subject to the control and supervision
of the Board of Directors of the Fund. For such services, MFR pays SMC an amount
equal to .15% of the average net assets of the Global Asset Allocation Series,
computed on a daily basis and payable monthly. SMC is a wholly-owned subsidiary
of Security Benefit Life Insurance Company.
For its services, MFR is entitled to receive compensation on an annual
basis equal to 1.0% of the average daily closing value of the net assets of each
of Emerging Markets Total Return and Global Asset Allocation Series and .75% of
the average daily closing value of the net assets of Global High Yield Series,
computed on a daily basis and payable monthly. During the fiscal year ended
December 31, 1996 and the period June 1, 1995 (date of inception) to December
31, 1995, the former Investment Adviser, SMC, waived its advisory fee in the
amount of $34,900 and $9,033, respectively; after the fee waiver, Global High
Yield Series paid $0 and $7,904, respectively, to SMC for its services. For the
fiscal year ended December 31, 1996 and the period June 1, 1995 (date of
inception) through December 31, 1995, expenses incurred by Global High Yield
Series exceeded 2.0% of the average net assets and accordingly, the former
investment adviser, SMC, reimbursed the Series $3,690 and $15,172, respectively.
Each Series will pay all of its expenses not assumed by MFR or the
Distributor including organization expenses; directors' fees; fees and expenses
of custodian; taxes and governmental fees; interest charges; membership dues;
brokerage commissions; reports; proxy statements; costs of stockholder and other
meetings; Class B distribution fees; and legal, auditing and accounting
expenses. Each Series also will pay for the preparation and distribution of the
prospectus to its stockholders and all expenses in connection with its
registration under federal and state securities laws. Each Series will pay
nonrecurring expenses as may arise, including litigation affecting it.
The Investment Advisory Contract between MFR and the Fund expires on May 1,
1998. The contract is renewable annually by the Fund's Board of Directors or by
a vote of a majority of a Series' outstanding securities and, in either event,
by a majority of the board who are not parties to the contract or interested
persons of any such party. The contract provides that it may be terminated
without penalty at any time by either party on 60 days' notice and is
automatically terminated in the event of assignment.
Pursuant to an Administrative Services Agreement with the Fund, SMC also
acts as the administrative agent for the Fund and as such performs
administrative functions and the bookkeeping, accounting and pricing functions
for the Series. For these services, SMC receives, on an annual basis, a fee of
.045% of the average net assets of the Series, calculated daily and payable
monthly. In addition, SMC receives, with respect to Global High Yield Series, an
annual fee equal to the greater of .10% of its average daily net assets or
$60,000 and with respect to the Emerging Markets Total Return and Asset
Allocation Series, an annual fee equal to the greater of .10% of its average
daily net assets or (i) $30,000 in the year ending May 1, 1998; (ii) $45,000 in
the year ending May 1, 1999; or (iii) $60,000 thereafter.
Under the Administrative Services Agreement identified above, SMC acts as
the transfer agent for the Series. As such, SMC performs all shareholder
servicing functions, including transferring record ownership, processing
purchase and redemption transactions, answering inquiries, mailing stockholder
communications and acting as the dividend disbursing agent. For these services,
SMC receives an annual maintenance fee of $8.00 per account, a fee of $1.00 per
shareholder transaction, and a fee of $1.00 per dividend transaction.
For the fiscal year ended December 31, 1996, the expense ratios were 1.98%
and 2.75%, respectively of the average net assets of Class A and B shares of the
Global High Yield Series. The expense figures quoted are net of expense
reimbursements and fees paid indirectly as a result of earnings credits earned
on overnight cash balances. Expense information is not yet available for the
other Series as they did not begin operations until May 1, 1997.
33
<PAGE>
The following persons are affiliated with the Funds and also with MFR in
these capacities:
- --------------------------------------------------------------------------------
POSITIONS WITH POSITIONS WITH
NAME THE FUND MFR ADVISORS, INC.
- --------------------------------------------------------------------------------
Maria Fiorini Ramirez None* President
Bruce Jensen None* Chief Investment Officer
Tim Downing None Chief Financial Officer
- --------------------------------------------------------------------------------
*It is anticipated that Maria Ramirez and Bruce Jensen will be appointed
directors of the Fund at a meeting of the Board of Directors of the Fund to be
held May 2, 1997.
- --------------------------------------------------------------------------------
The following persons are affiliated with the Funds and also with SMC in
these capacities:
- --------------------------------------------------------------------------------
POSITIONS WITH
SECURITY MANAGEMENT
NAME POSITIONS WITH THE FUND COMPANY, LLC
- --------------------------------------------------------------------------------
James R. Schmank Vice President and President (Interim),
Treasurer Treasurer, Chief Fiscal
Officer and Managing
Member Representative
John D. Cleland President and Director Senior Vice President and
Managing Member
Representative
Mark E. Young Vice President Vice President-Operations
Amy J. Lee Secretary Secretary
Brenda M. Harwood Assistant Treasurer and Assistant Vice President,
Assistant Secretary Assistant Treasurer
and Assistant Secretary
Steven M. Bowser Assistant Vice President Assistant Vice President
and Portfolio Manager
Gregory A. Hamilton Assistant Vice President Second Vice President
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
The Global Asset Allocation Series is managed by an investment team of MFR.
Bruce Jensen, Chief Investment Officer, has day-to-day responsibility for
managing the Series and directs the allocation of investments among common
stocks and fixed income securities. The common stock portion of the Series'
portfolio receives sub-investment advisory services from Lexington for
international equities and SMC for domestic equities. The Global High Yield
Series is managed by an investment management team of Lexington and MFR. Denis
P. Jamison and Maria Fiorini Ramirez have day-to-day responsibility for managing
the Series and have managed the Series since its inception in 1995. The Emerging
Markets Total Return Series is managed by an investment team of MFR. Bruce
Jensen, Chief Investment Officer, has day-to-day responsibility for managing the
Series and directs the allocation of investments among common stocks and fixed
income securities. The common stock portion of the Series receives
sub-investment advisory services from Lexington.
Denis P. Jamison, C.F.A., Senior Vice President, Director Fixed Income
Strategy of Lexington is responsible for fixed-income portfolio management. He
is a member of the New York Society of Security Analysts. Mr. Jamison has more
than 20 years investment experience. Prior to joining Lexington in 1981, Mr.
Jamison had spent nine years at Arnold Bernhard & Company, an investment
counseling and financial services organization. At Bernhard, he was a Vice
President supervising the security analyst staff and managing investment
portfolios. He is a specialist in government, corporate and municipal bonds. Mr.
Jamison is a graduate of the City College of New York with a B.A. in Economics.
Bruce Jensen, Chief Investment Officer of MFR, holds a bachelor's degree in
Accounting from Boston University and an M.B.A. in Finance from Fairleigh
Dickinson University. Prior to joining the Investment Manager in 1992, he spent
six years with the Pilgrim Group in Los Angeles and was Senior Vice President in
Charge of Fixed Income. Prior to Pilgrim, Mr. Jensen was a fixed income
Portfolio Manger with Lexington. Mr. Jensen has managed the Emerging Markets
Total Return and Global Asset Allocation Series since their inception, May 1,
1997.
Maria Fiorini Ramirez, President and Chief Executive Officer of MFR, began
her career as a credit analyst with American Express International Banking
Corporation in 1968. In 1972, she moved to Banco Nazionale De Lavoro in New
York. The following year, she started a ten year association with Merrill Lynch,
serving as Vice President and Senior Money Market Economist. She joined Becker
Paribas in 1984 as Vice President and Senior Money Market Economist before
joining Drexel Burnham Lambert that same year as First Vice President and Money
34
<PAGE>
Market Economist. She was promoted to Managing Director of Drexel in 1986. From
April 1990 to August 1992, Ms. Ramirez was the President and Chief Executive
Officer of Maria Ramirez Capital Consultants, Inc., a subsidiary of John Hancock
Freedom Securities Corporation. Ms. Ramirez established MFR in August 1992. She
is known in international financial, banking and economic circles for her
assessment of the interaction between global economic policy and political
trends and their effect on investments. Ms. Ramirez holds a B.A. in Business
Administration/Economics from Pace University.
CODE OF ETHICS
The Fund, MFR and the Distributor have a written Code of Ethics which
requires all access persons to obtain prior clearance before engaging in any
personal securities transactions. Access persons include officers and directors
of the Fund and MFR and employees that participate in, or obtain information
regarding, the purchase or sale of securities by the Series or whose job relates
to the making of any recommendations with respect to such purchases or sales.
All access persons must report their personal securities transactions within ten
days of the end of each calendar quarter. Access persons will not be permitted
to effect transactions in a security if it: (a) is being considered for purchase
or sale by one or more of the Series; (b) is being purchased or sold by one or
more of the Series; or (c) is being offered in an initial public offering. In
addition, portfolio managers are prohibited from purchasing or selling a
security within seven calendar days before or after a Series that he or she
manages trades in that security. Any material violation of the Code of Ethics is
reported to the Board of the Fund. The Board also reviews the administration of
the Code of Ethics on an annual basis.
DISTRIBUTOR
Security Distributors, Inc. (the "Distributor"), a Kansas corporation and
wholly-owned subsidiary of Security Benefit Group, Inc., serves as the principal
underwriter for shares of the Series and the other Series of the Fund: Corporate
Bond, Limited Maturity Bond, U.S. Government and High Yield Series pursuant to
Class A and Class B Distribution Agreements. The Distributor also acts as
principal underwriter for the following investment companies: Security Equity
Fund, Security Growth and Income Fund, Security Ultra Fund, Security Tax-Exempt
Fund, Variflex Variable Annuity Account, Variflex LS Variable Annuity Account,
the Parkstone Variable Annuity Account and Security Varilife Separate Account.
The Distributor receives a maximum commission on Class A Shares of 4.75%
and allows a maximum discount of 4.0% from the offering price to authorized
dealers on Fund shares sold. The discount is alike for all dealers, but the
Distributor may increase it for specific periods at its discretion. Salespersons
employed by dealers may also be licensed to sell insurance with Security Benefit
Life.
The Distributor received gross underwriting commissions on sales of Class A
shares and contingent deferred sales charges on redemptions of Class B shares of
Global High Yield Series of $8,510 and $2,167, and retained net underwriting
commissions of $4,824 and $379 for the fiscal year ended December 31, 1996 and
the period June 1, 1995 (date of inception) to December 31, 1995, respectively.
The Distributor, on behalf of the Fund, may act as a broker in the purchase
and sale of securities not effected on a securities exchange, provided that any
such transactions and any commissions shall comply with requirements of the
Investment Company Act of 1940 and all rules and regulations of the Securities
and Exchange Commission. The Distributor has not acted as a broker.
Each Series' Distribution Agreement is renewable annually either by the
Fund's Board of Directors or by a vote of a majority of the Series' outstanding
securities, and, in either event, by a majority of the board who are not parties
to the agreement or interested persons of any such party. The agreements may be
terminated by either party upon 60 days' written notice.
ALLOCATION OF PORTFOLIO BROKERAGE
Transactions in portfolio securities shall be effected in such manner as
deemed to be in the best interest of each Series. In reaching a judgment
relative to the qualifications of a broker or dealer to obtain the best
execution of a particular transaction, all relevant factors and circumstances
will be taken into account by MFR (or in some cases, Lexington or SMC),
including consideration of the overall reasonableness of commissions paid to a
broker, the firm's general execution and operational capabilities, and its
reliability and financial condition. The Global High Yield Series does not
anticipate that it will incur a significant amount of brokerage commissions
because fixed income securities are generally traded on a "net" basis--that is,
in principal amount without the addition or
35
<PAGE>
deduction of a stated brokerage commission, although the net price usually
includes a profit to the dealer. When trading fixed income securities, the
Series will deal directly with the selling or purchasing principal without
incurring charges for the services of a broker on its behalf unless it is
determined that a better price or execution may be obtained by utilizing the
services of a broker. The Series also may purchase portfolio securities in
underwritings where the price includes a fixed underwriter's concession or
discount. Money market instruments may be purchased directly from the issuer at
no commission or discount.
Portfolio transactions that require a broker may be directed to brokers who
furnish investment information or research services to MFR (or, if applicable,
Lexington or SMC). Such investment information and research services include
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities and the availability of securities and
purchasers or sellers of securities, and furnishing analyses and reports
concerning issues, industries, securities, economic factors and trends,
portfolio strategy, and performance of accounts. Such investment information and
research services may be furnished by brokers in many ways, including: (1)
on-line data base systems, the equipment for which is provided by the broker,
that enable registrant to have real-time access to market information, including
quotations; (2) economic research services, such as publications, chart services
and advice from economists concerning macroeconomic information; and (3)
analytical investment information concerning particular corporations. If a
transaction is directed to a broker supplying such information or services, the
commission paid for such transaction may be in excess of the commission another
broker would have charged for effecting that transaction, provided that MFR (or,
if applicable, Lexington or SMC) shall have determined in good faith that the
commission is reasonable in relation to the value of the investment information
or the research services provided, viewed in terms of either that particular
transaction or the overall responsibilities of MFR (or, if applicable, Lexington
or SMC) with respect to all accounts as to which it exercises investment
discretion. MFR (or, if applicable, Lexington or SMC) may use all, none, or some
of such information and services in providing investment advisory services to
each of the mutual funds under its management, including the Series.
In addition, brokerage transactions may be placed with broker/dealers who
sell shares of the Series (or other mutual funds/Series distributed by the
Distributor) who may or may not also provide investment information and research
services. MFR (or, if applicable, Lexington or SMC) may, consistent with the
NASD Rules of Fair Practice, consider sales of such shares in the selection of a
broker/dealer.
Securities held by the Series also may be held by other investment advisory
clients of MFR (or, if applicable, Lexington or SMC), including other investment
companies. In addition, SMC's parent company, Security Benefit Life Insurance
Company ("SBL"), also may hold some of the same securities as the Series. When
selecting securities for purchase or sale for a Series, MFR (or, if applicable,
Lexington or SMC) may, at the same time, be purchasing or selling the same
securities for one or more of such other accounts. Subject to each adviser's
obligation to seek best execution, such purchases or sales may be executed
simultaneously or "bunched." It is the policy of MFR, Lexington and SMC not to
favor one account over the other. Any purchase or sale orders executed
simultaneously (which with respect to SMC, may also include orders from SBL) are
allocated at the average price and as nearly as practicable on a pro rata basis
(transaction costs will also generally be shared on a pro rata basis) in
proportion to the amounts desired to be purchased or sold by each account. In
those instances where it is not practical to allocate purchase or sale orders on
a pro rata basis, then the allocation will be made on a rotating or other
equitable basis. While it is conceivable that in certain instances this
procedure could adversely affect the price or number of shares involved in the
Series' transaction, it is believed that the procedure generally contributes to
better overall execution of the Series' portfolio transactions. The Board of
Directors of the Fund has adopted guidelines governing this procedure and will
monitor the procedure to determine that the guidelines are being followed and
that the procedure continues to be in the best interest of the Fund and its
stockholders. With respect to the allocation of initial public offerings
("IPOs"), MFR (and Lexington and SMC) may determine not to purchase such
offerings for certain of its clients (including investment company clients) due
to the limited number of shares typically available in an IPO. No brokerage
commissions were paid by Global High Yield Series for the fiscal year ended
December 31, 1996 and the period June 1, 1995 (date of inception) to December
31, 1995.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Series is determined as of the close
of regular trading hours on the New York Stock Exchange (normally 3:00 p.m.
Central time) on each day that the Exchange is open for trading, which is Monday
through Friday except for the following dates when the Exchange is closed in
observance of
36
<PAGE>
Federal holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
July Fourth, Labor Day, Thanksgiving Day and Christmas Day. The determination is
made by dividing the total value of the portfolio securities of each Series,
plus any cash or other assets (including dividends accrued but not collected),
less all liabilities, by the number of shares outstanding of the Series.
Securities listed or traded on a national securities exchange are valued at
the last sale price. If there are no sales on a particular day, then the
securities are valued at the last bid price. All other securities, held by the
Series, for which market quotations are readily available, are valued on the
basis of the last current bid price. If there is no bid price, or if the bid
price is deemed to be unsatisfactory by the Board of Directors, then the
securities shall be valued in good faith by such method as the Board of
Directors determines will reflect fair market value. Valuations of the Series'
securities are supplied by a pricing service approved by the Board of Directors.
The Series will accept orders from dealers on each business day up to 4:30
p.m. (Central time).
HOW TO REDEEM SHARES
A stockholder may redeem shares at the net asset value next determined
after such shares are tendered for redemption. The amount received may be more
or less than the investor's cost, depending upon the market value of the
portfolio securities at the time of redemption.
Shares will be redeemed on request of the stockholder in proper order to
SMC which serves as the Series' transfer agent. A request is made in proper
order by submitting the following items to SMC: (1) a written request for
redemption signed by all registered owners exactly as the account is registered,
including fiduciary titles, if any, and specifying the account number and the
dollar amount or number of shares to be redeemed; (2) a guarantee of all
signatures on the written request or on the share certificate or accompanying
stock power; (3) any share certificates issued for any of the shares to be
redeemed; and (4) any additional documents which may be required by SMC for
redemption by corporations or other organizations, executors, administrators,
trustees, custodians or the like. Transfers of share ownership are subject to
the same requirements. A signature guarantee is not required for redemptions of
$10,000 or less, requested by and payable to all stockholders of record for an
account, to be sent to the address of record. The signature guarantee must be
provided by an eligible guarantor institution, such as a bank, broker, credit
union, national securities exchange or savings association. SMC reserves the
right to reject any signature guarantee pursuant to its written procedures which
may be revised in the future. To avoid delay in redemption or transfer,
stockholders having questions should contact SMC.
The amount due on redemption, will be the net asset value of the shares
next computed after the redemption request in proper order is received by SMC
less any applicable deferred sales charge. Payment of the redemption price will
be made by check (or by wire at the sole discretion of SMC if wire transfer is
requested, including name and address of the bank and the stockholder's account
number to which payment is to be wired) within seven days after receipt of the
redemption request in proper order. The check will be mailed to the
stockholder's registered address (or as otherwise directed). Remittance by wire
(to a commercial bank account in the same name(s) as the shares are registered)
or by express mail, if requested, will be at a charge of $15, which will be
deducted from the redemption proceeds.
When investing in the Series, stockholders are required to furnish their
tax identification number and to state whether or not they are subject to
withholding for prior underreporting, certified under penalties of perjury as
prescribed by the Internal Revenue Code. To the extent permitted by law, the
redemption proceeds of stockholders who fail to furnish this information will be
reduced by $50 to reimburse for the IRS penalty imposed for failure to report
the tax identification number on information reports.
Payment in cash of the amount due on redemption, less any applicable
deferred sales charge, for shares redeemed will be made within seven days after
tender, except that the Fund may suspend the right of redemption during any
period when trading on the New York Stock Exchange is restricted or such
Exchange is closed for other than weekends or holidays, or any emergency is
deemed to exist by the Securities and Exchange Commission. When a redemption
request is received, the redemption proceeds are deposited into a redemption
account established by the Distributor and the Distributor sends a check in the
amount of redemption proceeds to the stockholder. The Distributor earns interest
on the amounts maintained in the redemption account. Conversely, the Distributor
causes payments to be made to the Series in the case of orders for purchase of
Series shares before it receives federal funds.
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In addition to the foregoing redemption procedure, the Series repurchase
shares from broker/dealers at the price determined as of the close of business
on the day such offer is confirmed. Dealers may charge a commission on the
repurchase of shares.
The repurchase or redemption of shares held in a tax-qualified retirement
plan must be effected through the trustee of the plan and may result in adverse
tax consequences. (See "Retirement Plans," page 44.)
At various times the Series may be requested to redeem shares for which
they have not yet received good payment. Accordingly, the Series may delay the
mailing of a redemption check until such time as they have assured themselves
that good payment (e.g., cash or certified check on a U.S. bank) has been
collected for the purchase of such shares, which may take up to 15 days from the
purchase date.
TELEPHONE REDEMPTIONS
Stockholders of the Series may redeem uncertificated shares in amounts up
to $10,000 by telephone request, provided that the stockholder has completed the
Telephone Redemption section of the application or a Telephone Redemption form
which may be obtained from SMC. The proceeds of a telephone redemption will be
sent to the stockholder at his or her address as set forth in the application or
in a subsequent written authorization. Once authorization has been received by
SMC, a stockholder may redeem shares by calling the Fund at (800) 643-8188, on
weekdays (except holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central
time. Redemption requests received by telephone after the close of the New York
Stock Exchange (normally 3:00 p.m. Central time) will be treated as if received
on the next business day. Telephone redemptions are not accepted for IRA and
403(b)(7) accounts. A stockholder who authorizes telephone redemptions
authorizes SMC to act upon the instructions of any person identifying themselves
as the owner of the account or the owner's broker. SMC has established
procedures to confirm that instructions communicated by telephone are genuine
and will be liable for any losses due to fraudulent or unauthorized instructions
if it fails to comply with its procedures. SMC's procedures require that any
person requesting a redemption by telephone provide the account registration and
number, the owner's tax identification number, and the dollar amount or number
of shares to be redeemed, and such instructions must be received on a recorded
line. Neither the Fund, SMC, nor the Distributor will be liable for any loss,
liability, cost or expense arising out of any redemption request provided that
SMC complied with its procedures. Thus, a stockholder who authorizes telephone
redemptions may bear the risk of loss from a fraudulent or unauthorized request.
The telephone redemption privilege may be changed or discontinued at any time by
SMC or the Funds.
During periods of severe market or economic conditions, telephone
redemptions may be difficult to implement and stockholders should make
redemptions by mail as described under "How to Redeem Shares," page 37.
HOW TO EXCHANGE SHARES
Pursuant to arrangements with the Distributor, stockholders of the Series
may exchange their shares for shares of another of the Series or for Shares of
other mutual funds distributed by the Distributor (the "Security Funds"). Such
transactions generally have the same tax consequences as ordinary sales and
purchases and are not tax-free exchanges.
Class A and Class B shares of the Series may be exchanged for Class A and
Class B shares, respectively, of another of the Series or a Security Fund. Any
applicable contingent deferred sales charge will be calculated from the date of
the initial purchase.
Stockholders making such exchanges must provide SMC with sufficient
information to permit verification of their prior ownership of shares of one of
the other Series or Security Fund. Any such exchange is subject to the minimum
investment and eligibility requirements of each Series. No service fee is
presently imposed on such an exchange.
Exchanges may be accomplished by submitting a written request to SMC, 700
Harrison Street, Topeka, Kansas 66636-0001. Broker/dealers who process exchange
orders on behalf of their customers may charge a fee for their services.
Such fee may be avoided by making exchange requests directly to SMC.
An exchange of shares, as described above, may result in the realization of
a capital gain or loss for federal income tax purposes, depending on the cost or
other value of the shares exchanged. No representation is made as to whether
gain or loss would result from any particular exchange or as to the manner of
determining the amount of gain or loss. (See "Dividends and Taxes," page 39.)
Before effecting any exchange described herein, the investor may wish to seek
the advice of a financial or tax adviser.
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Exchanges of shares of the Series may be made only in jurisdictions where
shares of the Series being acquired may lawfully be sold. Stockholders are
advised to obtain and review carefully, the applicable prospectus prior to
effecting any exchange. A copy of such prospectus will be given any requesting
stockholder by the Distributor.
The exchange privilege may be changed or discontinued any time at the
discretion of the management of the Fund upon 60 days' notice to stockholders.
It is contemplated, however, that this privilege will be extended in the absence
of objection by regulatory authorities and provided that shares of the various
series are available and may be lawfully sold in the jurisdiction in which the
stockholder resides.
EXCHANGE BY TELEPHONE
To exchange shares by telephone, a stockholder must have completed either
the Telephone Exchange section of the application or a Telephone Transfer
Authorization form which may be obtained from SMC. Authorization must be on file
with SMC before exchanges may be made by telephone. Once authorization has been
received by SMC, a stockholder may exchange shares by telephone by calling (800)
643-8188, on weekdays (except holidays) between the hours of 7:00 a.m. and 6:00
p.m. Central time. Exchange requests received by telephone after the close of
the New York Stock Exchange (normally 3:00 p.m. Central time) will be treated as
if received on the next business day. Shares which are held in certificate form
may not be exchanged by telephone. The telephone exchange privilege is only
permitted between accounts with identical registration. SMC has established
procedures to confirm that instructions communicated by telephone are genuine
and will be liable for any losses due to fraudulent or unauthorized instructions
if it fails to comply with its procedures. SMC's procedures require that any
person requesting an exchange by telephone provide the account registration and
number, the tax identification number, the dollar amount or number of shares to
be exchanged, and the names of the Series from which and into which the exchange
is to be made, and such instructions must be received on a recorded line.
Neither the Fund, SMC, nor the Distributor will be liable for any loss,
liability, cost or expense arising out of any request, including any fraudulent
request provided SMC complied with its procedures. Thus, a stockholder who
authorizes telephone exchanges may bear the risk of loss from a fraudulent or
unauthorized request. This telephone exchange privilege may be changed or
discontinued at any time at the discretion of the management of the Fund. In
particular, the Fund may set limits on the amount and frequency of such
exchanges, in general or as to any individual who abuses such privilege.
DIVIDENDS AND TAXES
Each Series intends to qualify annually and elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify as a regulated investment company, each Series must,
among other things: (i) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to certain securities
loans, and gains from the sale or other disposition of stock, securities or
foreign currencies, or other income derived with respect to its business of
investing in such stock, securities, or currencies ("Qualifying Income Test");
(ii) derive in each taxable year less than 30% of its gross income from the sale
or other disposition of certain assets held less than three months (namely (a)
stock or securities, (b) options, futures and forward contracts (other than
those on foreign currencies), and (c) foreign currencies (including options,
futures, and forward contracts on such currencies) not directly related to a
Series' principal business of investing in stocks or securities (or options and
futures with respect to stocks and securities)); (iii) diversify its holdings so
that, at the end of each quarter of the taxable year, (a) at least 50% of the
market value of the Series' assets is represented by cash, cash items, U.S.
Government securities, the securities of other regulated investment companies,
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Series' total assets and 10% of the outstanding voting securities of such
issuer, and (b) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other regulated investment companies), or of two or more
issuers which the Series controls (as that term is defined in the relevant
provisions of the Code) and which are determined to be engaged in the same or
similar trades or businesses or related trades or businesses; and (iv)
distribute at least 90% of the sum of its investment company taxable income
(which includes, among other items, dividends, interest, and net short-term
capital gains in excess of any net long-term capital losses) and its net
tax-exempt interest each taxable year. The Treasury Department is authorized to
promulgate regulations under which foreign currency gains would constitute
qualifying income for
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purposes of the Qualifying Income Test only if such gains are directly related
to investing in securities (or options and futures with respect to securities).
To date, no such regulations have been issued.
A Series qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. Each
Fund intends to distribute to its stockholders, at least annually, substantially
all of its investment company taxable income and any net capital gains.
Generally, regulated investment companies, like the Series, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Series intends
to make its distributions in accordance with the calendar year distribution
requirement. A distribution will be treated as paid on December 31 of the
calendar year if it is declared by a Fund in October, November or December of
that year to shareholders of record on a date in such a month and paid by the
Series during January of the following calendar year. Such distributions are
taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
If, as a result of exchange controls or other foreign laws or restrictions
regarding repatriation of capital, a Series were unable to distribute an amount
equal to substantially all of its investment company taxable income (as
determined for U.S. tax purposes) within applicable time periods, the Series
would not qualify for the favorable federal income tax treatment afforded
regulated investment companies, or, even if it did so qualify, it might become
liable for federal taxes on undistributed income. In addition, the ability of a
Series to obtain timely and accurate information relating to its investments is
a significant factor in complying with the requirements applicable to regulated
investment companies in making tax-related computations. Thus, if a Series were
unable to obtain accurate information on a timely basis, it might be unable to
qualify as a regulated investment company, or its tax computations might be
subject to revisions (which could result in the imposition of taxes, interest
and penalties).
It is the policy of the Global High Yield Series to pay dividends from net
investment income quarterly and of the Emerging Markets Total Return and Global
Asset Allocation Series to distribute at least once a year substantially all of
its net investment income. It is the policy of the Series to make distributions
of realized capital gains (if any) in excess of any capital losses and capital
loss carryovers at least once a year. Because Class A shares of the Series bear
most of the costs of distribution of such shares through payment of a front-end
sales charge, while Class B shares of the Series bear such costs through a
higher distribution fee, expenses attributable to Class B shares, generally will
be higher and as a result, income distributions paid by the Series with respect
to Class B shares generally will be lower than those paid with respect to Class
A shares. All dividends and distributions are automatically reinvested on the
payable date in shares of the Series at net asset value, as of the record date
(reduced by an amount equal to the amount of the dividend or distribution),
unless SMC is previously notified in writing by the stockholder that such
dividends or distributions are to be received in cash. A stockholder may request
that such dividends or distributions be directly deposited to the stockholder's
bank account. A stockholder who elected not to reinvest dividends or
distributions paid with respect to Class A shares may, at any time within thirty
days after the payment date, reinvest the dividend check without imposition of a
sales charge. The Series will not pay dividends or distributions of less than
$25 in cash but will automatically reinvest them. Distributions of net
investment income and any short-term capital gains by the Series are taxable as
ordinary income whether received in cash or reinvested in additional shares.
Stockholders will report as long-term capital gains income any realized net
long-term capital gains in excess of any capital loss carryover which is
distributed to them, and designated by the Series as a capital gain dividend
whether received in cash or reinvested in additional shares, and regardless of
the period of time such shares have been owned by the stockholder. Advice as to
the tax status of each year's dividends and distributions will be mailed
annually.
Stockholders of the Series who redeem their shares generally will realize
gain or loss upon the sale or redemption (including the exchange of shares for
shares of another fund) which will be capital gain or loss if the shares are
capital assets in the stockholder's hands, and will be long-term capital gain or
loss if the shares have
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been held for more than one year. Investors should be aware that any loss
realized upon the sale or redemption of shares held for six months or less will
be treated as a long-term capital loss to the extent of any distribution of
long-term capital gain to the stockholder with respect to such shares. In
addition, any loss realized on a sale or exchange of shares will be disallowed
to the extent the shares disposed of are replaced within a period of 61 days,
beginning 30 days before and ending 30 days after the date the shares are
disposed of, such as pursuant to the reinvestment of dividends. In such case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
Under certain circumstances, the sales charge incurred in acquiring Class A
shares of a Series may not be taken into account in determining the gain or loss
on the disposition of those shares. This rule applies in circumstances when
shares of the Series are exchanged within 90 days after the date they were
purchased and new shares in a regulated investment company are acquired without
a sales charge or at a reduced sales charge. In that case, the gain or loss
recognized on the exchange will be determined by excluding from the tax basis of
the shares exchanged all or a portion of the sales charge incurred in acquiring
those shares. This exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired shares is reduced as a result of
having incurred the sales charge initially. Instead, the portion of the sales
charge affected by this rule will be treated as an amount paid for the new
shares.
The Series are required by law to withhold 31% of taxable dividends and
distributions to stockholders who do not furnish their correct taxpayer
identification numbers, or are otherwise subject to the backup withholding
provisions of the Internal Revenue Code.
Each Series will be treated separately in determining the amounts of income
and capital gains distributions. For this purpose, each Series will reflect only
the income and gains, net of losses of that Series.
A purchase of shares shortly before payment of a dividend or distribution
would be disadvantageous because the dividend or distribution to the purchaser
would have the effect of reducing the per share net asset value of his or her
shares by the amount of the dividends or distributions. In addition all or a
portion of such dividends or distributions, although in effect a return of
capital, are subject to taxes, which may be at ordinary income tax rates.
OPTIONS, FUTURES AND FORWARD CONTRACTS AND SWAP AGREEMENTS. Certain
options, futures contracts, and forward contracts in which a Series may invest
may be "Section 1256 contracts." Gains or losses on Section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses; however, foreign currency gains or losses arising from certain Section
1256 contracts may be treated as ordinary income or loss. Also, Section 1256
contracts held by a Series at the end of each taxable year (and at certain other
times as prescribed pursuant to the Code) are "marked to market" with the result
that unrealized gains or losses are treated as though they were realized.
Generally, the hedging transactions undertaken by a Series may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Series. In addition, losses
realized by a Series on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of transactions in options, futures, forward
contracts, swap agreements and other financial contracts to a Series are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by a Series which is taxed as ordinary income when distributed to
shareholders.
A Series may make one or more of the elections available under the Code
which are applicable to straddles. If a Series makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
Because only a few regulations regarding the treatment of swap agreements,
and related caps, floors and collars, have been implemented, the tax
consequences of such transactions are not entirely clear. The Series intend to
account for such transactions in a manner deemed by them to be appropriate, but
the Internal Revenue
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Service might not necessarily accept such treatment. If it did not, the status
of a Series as a regulated investment company might be affected.
The requirements applicable to a Series' qualification as a regulated
investment company may limit the extent to which a Series will be able to engage
in transactions in options, futures contracts, forward contracts, swap
agreements and other financial contracts.
FOREIGN TAXATION. Income received by a Series from sources within a foreign
country may be subject to withholding and other taxes imposed by that country.
Tax conventions between certain countries and the U.S. may reduce or eliminate
such taxes.
FOREIGN CURRENCY TRANSACTIONS. Under the Code, gains or losses attributable
to fluctuations in exchange rates which occur between the time a Series accrues
income or other receivables or accrues expenses or other liabilities denominated
in a foreign currency and the time that Series actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of a Series' investment company taxable
income to be distributed to its shareholders as ordinary income.
ORIGINAL ISSUE DISCOUNT. Debt securities purchased by a Series (such as
zero coupon bonds) may be treated for U.S. federal income tax purposes as having
original issue discount. Original issue discount is treated as interest for
federal income tax purposes and can generally be defined as the excess of the
stated redemption price at maturity over the issue price. Original issue
discount, whether or not cash payments actually are received by a Series, is
treated for federal income tax purposes as income earned by the Series, and
therefore is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount included in the income of the Series each
year is determined on the basis of a constant yield to maturity which takes into
account the compounding of accrued interest.
In addition, debt securities may be purchased by a Series at a discount
which exceeds the original issue discount remaining on the securities, if any,
at the time the Series purchased the securities. This additional discount
represents market discount for income tax purposes. Treatment of market discount
varies depending upon the maturity of the debt security. Generally, in the case
of any debt security having a fixed maturity date of more than one year from the
date of issue and having market discount, the gain realized on disposition will
be treated as ordinary income to the extent it does not exceed the accrued
market discount on the security (unless the Series elects for all its debt
securities having a fixed maturity date of more than one year from the date of
issue to include market discount in income in tax years to which it is
attributable). Generally, market discount accrues on a daily basis. For any debt
security having a fixed maturity date of not more than one year from the date of
issue, special rules apply which may require in some circumstances the ratable
inclusion of income attributable to discount at which the bond was acquired as
calculated under the Code. A Series may be required to capitalize, rather than
deduct currently, part or all of any net direct interest expense on indebtedness
incurred or continued to purchase or carry any debt security having market
discount (unless the Series makes the election to include market discount
currently).
OTHER TAXES. The foregoing discussion is general in nature and is not
intended to provide an exhaustive presentation of the tax consequences of
investing in a Series. Distributions may also be subject to additional state,
local and foreign taxes, depending on each shareholder's particular situation.
Depending upon the nature and extent of a Series' contacts with a state or local
jurisdiction, the Series may be subject to the tax laws of such jurisdiction if
it is regarded under applicable law as doing business in, or as having income
derived from, the jurisdiction. Shareholders are advised to consult their own
tax advisers with respect to the particular tax consequences to them of an
investment in a Series.
ORGANIZATION
The Articles of Incorporation of the Fund provide for the issuance of
shares of common stock in one or more classes or series.
The Fund has authorized the issuance of an indefinite number of shares of
capital stock of $1.00 par value and currently issues its shares in the
following series: Emerging Markets Total Return, Global Asset Allocation, Global
High Yield, Corporate Bond, Limited Maturity Bond, U.S. Government and High
Yield Series. The shares of
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each Series of the Fund represent a pro rata beneficial interest in that Series'
net assets and in the earnings and profits or losses derived from the investment
of such assets.
Each of the series of the Fund currently issues two classes of shares which
participate proportionately based on their relative net asset values in
dividends and distributions and have equal voting, liquidation and other rights
except that (i) expenses related to the distribution of each class of shares or
other expenses that the Board of Directors may designate as class expenses from
time to time, are borne solely by each class; (ii) each class of shares has
exclusive voting rights with respect to any Distribution Plan adopted for that
class; (iii) each class has different exchange privileges; and (iv) each class
has a different designation. When issued and paid for, the shares of the Series
will be fully paid and nonassessable. Shares may be exchanged as described above
under "Exchange Privilege," but will have no other preference, conversion,
exchange or preemptive rights. Shares are transferable, redeemable and
assignable and have cumulative voting privileges for the election of directors.
On certain matters, such as the election of directors, all shares of the
series of the Fund vote together with each share having one vote. On other
matters affecting a particular Series, such as the investment advisory contract
or the fundamental policies, only shares of that Series are entitled to vote,
and a majority vote of the shares of that Series is required for approval of the
proposal.
The Fund does not generally hold annual meetings of stockholders and will
do so only when required by law. Stockholders may remove directors from office
by vote cast in person or by proxy at a meeting of stockholders. Such a meeting
will be called at the written request of 10% of the Fund's outstanding shares.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
Chase Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, New York, acts as
custodian for the portfolio securities of the Series, including those held by
foreign banks and foreign securities depositories which qualify as eligible
foreign custodians under the rules adopted by the Securities and Exchange
Commission. SMC acts as the Series' transfer and dividend-paying agent.
INDEPENDENT AUDITORS
The firm of Ernst & Young LLP, One Kansas City Place, 1200 Main Street,
Kansas City, Missouri, has been selected by a majority of the independent
directors of the Fund to serve as the independent auditors of the Series, and as
such, the firm will perform the annual audit of each Series' financial
statements.
PERFORMANCE INFORMATION
The Series may, from time to time, include performance information in
advertisements, sales literature or reports to stockholders or prospective
investors. Performance information in advertisements or sales literature may be
expressed as yield and average annual total return and aggregate total return
for each Series.
Quotations of yield will be based on the investment income per share earned
during a particular 30-day period, less expenses per share accrued during the
period ("net investment income") and will be computed by dividing net investment
income by the maximum offering price per share on the last day of the period,
according to the following formula:
YIELD = 2[(A-B + 1)6 - 1]
---
cd
where A = dividends and interest earned during the period, B = expenses accrued
for the period (net of any reimbursements), C = the average daily number of
shares outstanding during the period that were entitled to receive dividends,
and D = the maximum offering price per share on the last day of the period.
For the 30-day period ended December 31, 1996, the yield for the Class A
shares of the Global High Yield Series was 8.21% and for the Class B shares was
7.83%.
There is no assurance that a yield quoted will remain in effect for any
period of time. Inasmuch as certain estimates must be made in computing average
daily yield, actual yields may vary and will depend upon such factors as the
type of instruments in the Series' portfolio, the portfolio quality and average
maturity of such instruments, changes in interest rates and the actual Series
expenses. Yield computations will reflect the expense limitations described in
this Prospectus under "Investment Management."
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Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in a
Series over periods of 1, 5 and 10 years (up to the life of the Series),
calculated pursuant to the following formula:
P(1+T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All average
annual total return figures will reflect the deduction of the maximum initial
sales load in the case of quotations of performance of Class A shares or the
applicable contingent deferred sales charge in the case of quotations of
performance of Class B shares and a proportional share of Series expenses on an
annual basis, and assume that all dividends and distributions are reinvested
when paid.
For the 1-year period ended December 31, 1996, the average annual total
return for Class A and B shares respectively of Global High Yield Series was
6.24% and 5.67%. For the period June 1, 1995 (date of inception) to December 31,
1996 the average annual total return for Class A and B shares respectively of
Global High Yield Series was 8.63% and 8.78%.
The aggregate total return for the Series is calculated for any specified
period of time pursuant to the following formula:
P(1+T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the total return, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All aggregate total return figures will assume that
all dividends and distributions are reinvested when paid. The Series may, from
time to time, include quotations of total return that do not reflect deduction
of the sales load which, if reflected, would reduce the total return data
quoted.
The aggregate total return on an investment made in Class A shares of
Global High Yield Series calculated as described above for the period from June
1, 1995 (date of inception) through December 31, 1996 was 14.0%. This figure
reflects deduction of the maximum initial sales load.
The aggregate total return on an investment made in Class B shares of
Global High Yield Series for the same period was 14.3%. This figure reflects
deduction of the maximum contingent deferred sales charge.
In addition, quotations of aggregate total return will also be calculated
for several consecutive one-year periods expressing the total return as a
percentage increase or decrease in the value of the investment for each year
relative to the ending value for the previous year.
Quotations of yield, average annual total return and aggregate total return
will reflect only the performance of a hypothetical investment during the
particular time period shown. Such quotations will vary based on changes in
market conditions and the level of the Series' expenses, and no reported
performance figure should be considered an indication of performance which may
be expected in the future.
In connection with communicating its yield, average annual total return or
aggregate total return to current or prospective stockholders, each Series also
may compare these figures to the performance of other mutual funds tracked by
mutual fund rating services or to other unmanaged indexes which may assume
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs. Each Series will include performance data
for both Class A and Class B shares of the Series in any advertisement or report
including performance data of the Series. Such mutual fund rating services
include the following: Lipper Analytical Services; Morningstar, Inc.; Investment
Company Data; Schabacker Investment Management; Wiesenberger Investment
Companies Service; Computer Directions Advisory (CDA); and Johnson Charts.
RETIREMENT PLANS
The Series offers tax-qualified retirement plans for individuals
(Individual Retirement Accounts, known as IRAs), SIMPLE IRAs, several prototype
retirement plans for the self-employed (Keogh plans), pension and profit-sharing
plans for corporations, and custodial account plans for employees of public
school systems and organizations meeting the requirements of Section 501(c)(3)
of the Internal Revenue Code. Actual documents and detailed materials about the
plans will be provided upon request to the Distributor.
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Purchases of shares of the Series under any of these plans are made at the
public offering price next determined after contributions are received by the
Distributor. Shares owned under any of the plans have full dividend, voting and
redemption privileges. Depending upon the terms of the particular plan,
retirement benefits may be paid in a lump sum or in installment payments over a
specified period. There are possible penalties for premature distributions from
such plans.
SMC is available to act as custodian for the plans on a fee basis. For
IRAs, SIMPLE IRAs, Section 403(b) Retirement Plans, and Simplified Employee
Pension Plans (SEPPs), service fees for such custodial services currently are:
(1) $10 for annual maintenance of the account, and (2) benefit distribution fee
of $5 per distribution. Service fees for other types of plans will vary. These
fees will be deducted from the plan assets. Optional supplemental services are
available from Security Benefit Life Insurance Company for additional charges.
Retirement investment programs involve commitments covering future years.
It is important that the investment objective and structure of the Series be
considered by the investors for such plans. Investments in insurance and annuity
contracts also may be purchased in addition to shares of the Series.
A brief description of the available tax-qualified retirement plans is
provided below. However, the tax rules applicable to such qualified plans vary
according to the type of plan and the terms and conditions of the plan itself.
Therefore, no attempt is made to provide more than general information about the
various types of qualified plans.
Investors are urged to consult their own attorneys or tax advisers when
considering the establishment and maintenance of any such plans.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
Individual Retirement Account Custodial Agreements are available to provide
investment in shares of the Series. An individual may initiate an IRA through
the Distributor by executing the custodial agreement and making a minimum
initial investment of at least $100. A $10 annual fee is charged for maintaining
the account.
An individual may make a contribution to an IRA each year of up to the
lesser of $2,000 or 100% of earned income under current tax law. If
contributions are also made to an IRA of a nonworking spouse, the maximum is
raised to a total for the two accounts of $4,000, provided no more than $2,000
is contributed to either account. If both husband and wife work, each may
establish his or her own IRA and contribute up to the maximum allowed for
individuals.
Deductions for IRA contributions are limited for taxpayers who are covered
by an employer-sponsored retirement plan. However, these limitations do not
apply to a single taxpayer with adjusted gross income of $25,000 or less or
married taxpayers with adjusted gross income of $40,000 or less (if they file a
joint tax return). Taxpayers with adjusted gross income less than $10,000 in
excess of these amounts may deduct a portion of their IRA contributions. The
nondeductible portion is calculated by reference to the amount of the taxpayer's
income above $25,000 (single) or $40,000 (married) as a percentage of $10,000.
Contributions must be made in cash no later than April 15 following the
close of the tax year. No annual contribution is permitted for the year in which
the investor reaches age 70 1/2 or any year thereafter.
In addition to annual contributions, total distributions and certain
partial distributions from certain employer-sponsored retirement plans may be
eligible to be reinvested into an IRA if the reinvestment is made within 60 days
of receipt of the distribution by the taxpayer. Such rollover contributions are
not subject to the limitations on annual IRA contributions described above.
SIMPLE IRAS
The Small Business Job Protection Act of 1996 created a new retirement
plan, the Savings Incentive Match Plan for Employees of Small Employers (SIMPLE
Plans). SIMPLE Plan participants must establish a SIMPLE IRA into which plan
contributions will be deposited.
The Investment Manager makes available SIMPLE IRAs to provide investment in
shares of the Series. Contributions to a SIMPLE IRA may be either salary
deferral contributions or employer contributions. Contributions must be made in
cash and cannot exceed the maximum amount allowed under the Internal Revenue
Code. On a pre-tax basis, up to $6,000 of compensation (through salary
deferrals) may be contributed to a SIMPLE IRA. In addition, employers are
required to make either (1) a dollar-for-dollar matching contribution or (2) a
nonelective contribution to each participant's account each year. In general,
matching contributions must equal up to 3% of compensation, but under certain
circumstances, employers may make lower matching
45
<PAGE>
contributions. Instead of the match, employers may make a nonelective
contribution equal to 2% of compensation (compensation for purposes of any
nonelective contribution is limited to $160,000, as indexed).
Distributions from a SIMPLE IRA are (1) taxed as ordinary income; (2)
includable in gross income; and (3) subject to applicable state tax laws.
Distributions prior to age 59 1/2 may be subject to a 10% penalty tax which
increases to 25% for distributions made before a participant has participated in
the SIMPLE Plan for at least two years. An annual fee of $10 is charged for
maintaining the SIMPLE IRA.
PENSION AND PROFIT-SHARING PLANS
Prototype corporate pension or profit-sharing prototype plans meeting the
requirements of Internal Revenue Code Section 401(a) are available. Information
concerning these plans may be obtained from Security Distributors, Inc.
403(B) RETIREMENT PLANS
Employees of public school systems and tax-exempt organizations meeting the
requirements of Internal Revenue Code Section 501(c)(3) may purchase custodial
account plans funded by their employers with shares of the Series in accordance
with Code Section 403(b). Section 403(b) plans are subject to numerous
restrictions on the amount that may be contributed, the persons who are eligible
to participate and on the time when distributions may commence.
SIMPLIFIED EMPLOYEE PENSION PLANS (SEPPS)
A prototype SEPP is available for corporations, partnerships or sole
proprietors desiring to adopt such a plan for purchases of IRAs for their
employees. Employers establishing a SEPP may contribute a maximum of $30,000 a
year to an IRA for each employee. This maximum is subject to a number of
limitations.
FINANCIAL STATEMENTS
The audited financial statements of Global High Yield Series, which are
contained in the Fund's Annual Report dated December 31, 1996, are incorporated
herein by reference. Copies of the Annual Report are provided to every person
requesting the Statement of Additional Information. Financial Statements for
Emerging Markets Total Return and Global Asset Allocation Series are not yet
available as these Series did not begin operation until May 1, 1997.
46
<PAGE>
APPENDIX A
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of a Series alone or in combination with
Class A shares of another of the Series.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation, a Statement of Intention or Letters of
Intent, the term "Purchaser" includes the following persons: an individual; his
or her spouse and children under the age 21; a trustee or other fiduciary of a
single trust estate or single fiduciary account established for their benefit;
an organization exempt from federal income tax under Section 501(c)(3) or (13)
of the Internal Revenue Code; or a pension, profit-sharing or other employee
benefit plan whether or not qualified under Section 401 of the Internal Revenue
Code.
RIGHTS OF ACCUMULATION
To reduce sales charges on purchases of Class A shares of the Series, a
Purchaser may combine all previous purchases with a contemplated current
purchase of Class A shares of a Series for the purpose of determining the sales
charge applicable to the current purchase. For example, an investor who already
owns Class A shares of a Series either worth $30,000 at the applicable current
offering price or purchased for $30,000 and who invests an additional $25,000,
is entitled to a reduced sales charge of 3.75% on the latter purchase. The
Distributor must be notified when a sale takes place which would qualify for the
reduced charge on the basis of previous purchases subject to confirmation of the
investor's holdings through the Fund's records. Rights of accumulation apply
also to purchases representing a combination of the Class A shares of two or
more of the Series in those states where shares of the Series being purchased
are qualified for sale.
STATEMENT OF INTENTION
A Purchaser may sign a Statement of Intention, which may be signed within
90 days after the first purchase to be included thereunder, in the form provided
by the Distributor covering purchases of the Series to be made within a period
of 13 months (or a 36-month period for purchases of $1 million or more) and
thereby become eligible for the reduced front-end sales charge applicable to the
actual amount purchased under the Statement. Five percent of the amount
specified in the Statement of Intention will be held in escrow shares until the
Statement is completed or terminated. The shares so held may be redeemed by the
Fund if the investor is required to pay additional sales charge which may be due
if the amount of purchases made by the investor during the period the Statement
is effective is less than the total specified in the Statement of Intention.
A Statement of Intention may be revised during the 13-month period (or, if
applicable, 36-month period). Additional Class A shares received from
reinvestment of income dividends and capital gains distributions (if any are
realized) are included in the total amount used to determine reduced sales
charges. The Statement is not a binding obligation upon the investor to purchase
or any Series to sell the full indicated amount. An investor considering signing
such an agreement should read the Statement of Intention carefully. A Statement
of Intention form may be obtained from SMC.
47
<PAGE>
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of a Series have a one-time
privilege (1) to reinstate their accounts by purchasing shares of the Series
without a sales charge up to the dollar amount of the redemption proceeds, or
(2) to the extent the redeemed shares would have been eligible for the exchange
privilege, to purchase Class A shares of another of the Series up to the dollar
amount of the redemption proceeds at a sales charge equal to the additional
sales charge, if any, which would have been applicable had the redeemed shares
been exchanged pursuant to the exchange privilege. Written notice and a check in
the amount of the reinvestment from eligible stockholders wishing to exercise
this reinstatement privilege must be received by the Fund within thirty days
after the redemption request was received (or such longer period as may be
permitted by rules and regulations promulgated under the Investment Company Act
of 1940). The net asset value used in computing the amount of shares to be
issued upon reinstatement or exchange will be the net asset value on the day
that notice of the exercise of the privilege is received. Stockholders making
use of the reinstatement privilege should note that any gains realized upon the
redemption will be taxable while any losses may be deferred under the "wash
sale" provision of the Internal Revenue Code.
48
<PAGE>
SECURITY FUNDS
ANNUAL REPORT
DECEMBER 31, 1996
SECURITY INCOME FUND
- CORPORATE BOND SERIES
- U.S. GOVERNMENT SERIES
- LIMITED MATURITY BOND SERIES
- GLOBAL AGGRESSIVE BOND SERIES
- HIGH YIELD BOND SERIES
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
[SDI LOGO]
<PAGE>
PRESIDENT'S LETTER
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
[PHOTO OF JOHN CLELAND]
JOHN CLELAND
Dear Shareholder:
1996 was not a particularly good year for fixed income investors. Interest
rates fluctuated dramatically throughout the year, with the thirty-year Treasury
bond beginning the year at 5.94% and ending it 70 basis points higher at 6.64%.
Only in the global fixed income markets did we see attractive returns. The U.S.
markets continued to be ruled by investors' fears about the reemergence of
inflationary pressures and expectations as to the future rate of economic
growth. Although growth was moderate and inflation remained well under control,
the fear, rather than the fact, dominated bond market movements.
1997 OUTLOOK FOR FIXED INCOME
We believe the fixed income outlook for 1997 is much better. We expect that
last year's moderate inflation levels will remain in place for some time.
Consumer spending, a primary force behind rising inflation, will be restrained
by the high household debt levels now in place. Although many people are
experiencing the "wealth effect" of strong stock markets, these individuals tend
to be savers rather than spenders and are content to watch their earnings grow.
BALANCED BUDGET PROSPECTS IMPROVING
A strong positive for bond markets is the likelihood that a balanced budget
proposal will become reality in 1997. Sentiment is strong on both sides of the
congressional aisle, and since 1997 is not an election year, the possibility of
bipartisan agreement is greater than usual. Should a balanced budget package
become a reality, the promise of reduced Federal spending lowers the potential
for inflation and pleases fixed income investors.
DECLINING GLOBAL INTEREST RATES
An additional plus for fixed income is the outlook for declining global
interest rates as inflation drops in many countries around the world, and as the
European nations work to meet criteria for entry into the European Monetary
Union. Many of these nations have reduced their debt levels, allowing interest
rates to come down in the process. They will continue along this track as the
January, 1998 date for selection of participants in the EMU approaches.
In our opinion, all of these factors combined make an excellent backdrop
for favorable fixed income performance in the year ahead. As always, we invite
your comments and questions.
Sincerely,
John Cleland
President, Security Funds
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MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
SECURITY INCOME FUND
CORPORATE BOND SERIES
At the beginning of 1996 the Corporate Bond Series' average maturity and
duration were long relative to our benchmark index, anticipating a continuation
of the previous year's low inflation, moderate economic growth and declining
interest rates. At that time the yield on the thirty-year Treasury bond was
5.94%. The first major economic release for the year, the January employment
figures, shocked bond investors when it showed much higher levels of employment
than expected. This set the tone for a year of uncertainty about economic growth
and inflation. The long Treasury bond rose to a high of almost 7.20% in June and
again in July. It closed the year down from that level, but at 6.64%, it
remained well above its opening level for the year.
EARLY STEPS TO READJUST THE PORTFOLIO
In February we began shortening the maturity structure of the portfolio to be
more in line with that of the benchmark index and with our peers. In addition,
we started purchasing issues in three newly-approved asset classes, including
U.S. dollar-denominated foreign bonds ("Yankee" bonds), high yield bonds and
mortgage-backed securities. These proved to be wise moves, as the high yield and
mortgage sectors outperformed corporate bonds throughout the year. For most of
1996 mortgage-backed securities made up about 15% of the portfolio and high
yield issues approximately 17%.
The exposure to Yankee bonds also did well, with about 12% of the portfolio
invested in such issues. The largest of these holdings is Banco Santander, one
of the largest banks in Spain with assets in excess of $132 billion (U.S.
dollars). Others in the Yankee bond sector include Abbey National Bank PLC,
Malayan Bank of New York, Panamerican Beverage Company and Banco Centrale
Hispanoamericano.(1)
HIGH YIELD HOLDINGS IN THE SECOND HALF OF THE YEAR
After we realigned the portfolio's maturity structure early in the year,
performance was strong in the second and third quarters as we outperformed both
our benchmark index and our peer group. The fourth quarter was a different
story. Performance was negatively impacted by our investment in Marvel Holdings,
Inc. bonds, which declined substantially in value after the company announced
poor earnings warning investors of liquidity problems. Another high yield issue,
Home Holdings, also lost considerable value after the company became involved in
litigation surrounding the lease on its Maiden Lane headquarters in New York.
Given the negative contribution of these two high yield bond positions, we have
refined our strategy for using high yield issues in the portfolio.
CORPORATE BOND SERIES
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
LEHMAN BROTHERS MUTUAL FUND
CORPORATE BOND SERIES A RATED CORPORATE INDEX
Dec-86 10,000.00 10,000.00
Mar-87 9,703.81 10,238.19
Jun-87 9,723.63 9,998.72
Sep-87 9,507.70 9,636.25
Dec-87 9,912.07 10,254.88
Mar-88 10,148.80 10,709.96
Jun-88 10,207.11 10,829.28
Sep-88 10,412.20 11,084.10
Dec-88 10,552.90 11,199.96
Mar-89 10,669.88 11,334.85
Jun-89 11,299.14 12,232.34
Sep-89 11,333.50 12,391.71
Dec-89 11,604.98 12,778.23
Mar-90 11,614.62 12,666.49
Jun-90 12,036.94 13,160.90
Sep-90 11,840.35 13,158.24
Dec-90 12,366.74 13,679.94
Mar-91 12,837.14 14,263.89
Jun-91 13,071.20 14,547.56
Sep-91 13,745.07 15,401.42
Dec-91 14,361.26 16,213.50
Mar-92 14,318.75 16,095.03
Jun-92 14,851.65 16,794.18
Sep-92 15,462.72 17,587.34
Dec-92 15,646.32 17,622.01
Mar-93 16,606.87 18,511.92
Jun-93 17,221.42 19,130.69
Sep-93 17,977.33 19,795.61
Dec-93 17,791.61 19,765.82
Mar-94 16,869.03 19,069.77
Jun-94 16,277.95 18,769.78
Sep-94 16,227.66 18,907.48
Dec-94 16,321.15 18,990.13
Mar-95 17,093.77 20,114.83
Jun-95 18,000.28 21,610.95
Sep-95 18,342.75 22,120.25
Dec-95 19,295.99 23,212.59
Mar-96 18,602.69 22,613.56
Jun-96 18,593.95 22,714.57
Sep-96 18,996.48 23,168.14
Dec-96 19,195.17 23,974.49
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Corporate Bond
Series on December 31, 1986, and reflects deduction of the 4.75% sales load. On
December 31, 1996, the value of your investment in the Series' Class A shares
(with dividends reinvested) would have grown to $19,195. By comparison, the same
$10,000 investment would have grown to $23,974 based on the performance of the
Lehman Brothers Mutual Fund A Rated Corporate Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
Investments cannot be made directly in an index. The Lehman Brothers Mutual Fund
A Rated Corporate Index includes all corporate debt securities rated A or
higher.
CORPORATE BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES CLASS B SHARES
1 Year -5.69% 1 Year -6.29%
5 Years 4.96% Since Inception -0.28%
10 Years 6.74% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
2
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
In order to reduce the impact of negative performance by any one issue, we are
increasing the number of individual investments in the sector while keeping our
overall sector allocation unchanged. This has the effect of limiting the fund's
exposure to any one position to around 1% of portfolio assets.
THOUGHTS ABOUT 1997
We believe the outlook for bonds in 1997 is better than at this time in 1996.
Economic growth should continue at a slow but steady pace, restrained somewhat
by slow consumer spending as individuals concentrate on reducing their debt
burdens. The Federal Reserve Open Market Committee will continue its vigilant
stance against inflation. Aided by falling global inflation and interest rates,
we believe the U.S. bond markets should be able to post a near-average
performance year.
Greg Hamilton
Portfolio Manager
(1) Investing in foreign countries may involve risks, such as non-uniform
accounting practices and political instability, not associated with investing
exclusively in the U.S.
3
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
U.S. GOVERNMENT SERIES
The U.S. Government securities markets had mixed results in 1996, as the
interest rate on the long Treasury bond rose from 5.94% at the beginning of the
year to 6.64% at its close. Its total return for the year was -2.3%, while over
the same period the two-year Treasury note gained 5.2%. The U.S. Government
Series, which contains issues of varying maturities, fell in between the two
with a total return for the year of 1.26%.(1)
MORTGAGE-BACKED SECURITIES REPRESENTATION
About 30% of the portfolio was invested in mortgage-backed securities (primarily
GNMA's) most of the year. These issues perform well in bear markets because
generally as interest rates rise fewer people refinance their home mortgages.
This reduces prepayments on mortgage-backed securities and helps stabilize their
prices. The issues we hold have coupon rates ranging from 7.5% to 8.5%, adding
an attractive income stream to the portfolio's return.
REALIGNMENT OF MATURITY STRUCTURE
In February and March the yield on the thirty-year Treasury bond rose from 6.02%
to 6.64%, its largest price decline of the year. The U.S. Government Series
contained a number of long-maturity issues at the beginning of February which
hurt portfolio performance at that time. Part of these issues were sold in
March, which helped the balance of the year, but of course could not repair the
damage done before the sales.
PLANS FOR 1997
We believe that interest rates in the first half of 1997 have a good chance of
declining as economic activity slows somewhat and inflation remains well under
control. We may increase the percentage of the portfolio holdings in GNMA
mortgage-backed security issues, as we feel that the greatest portion of total
return in 1997 will come from the income stream provided by the securities. The
duration of the portfolio will probably remain close to its current level of
about five years. Although the year ahead may not be an outstanding one for
fixed income instruments, we believe it will be at least an average one for
total returns.
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge.
U.S. GOVERNMENT SERIES
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
LEHMAN BROTHERS
U.S. GOVERNMENT FUND GOVERNMENT BOND INDEX
Dec-86 10,000.00 10,000.00
Mar-87 9,695.19 10,117.61
Jun-87 9,651.76 9,941.33
Sep-87 9,536.30 9,673.52
Dec-87 9,888.91 10,219.24
Mar-88 10,127.06 10,556.47
Jun-88 10,291.91 10,656.38
Sep-88 10,454.04 10,836.28
Dec-88 10,505.92 10,938.28
Mar-89 10,615.66 11,054.50
Jun-89 11,225.05 11,943.56
Sep-89 11,372.80 12,042.24
Dec-89 11,746.96 12,495.17
Mar-90 11,737.54 12,339.91
Jun-90 12,139.99 12,771.22
Sep-90 12,296.99 12,877.35
Dec-90 12,897.97 13,585.14
Mar-91 13,219.23 13,879.19
Jun-91 13,441.26 14,066.86
Sep-91 14,080.07 14,870.35
Dec-91 14,677.02 15,667.87
Mar-92 14,495.80 15,393.80
Jun-92 14,921.60 16,002.98
Sep-92 15,248.08 16,792.31
Dec-92 15,401.64 16,799.94
Mar-93 16,112.26 17,558.69
Jun-93 16,728.69 18,066.80
Sep-93 17,281.45 18,652.97
Dec-93 17,209.28 18,590.11
Mar-94 16,534.56 18,030.26
Jun-94 16,135.91 17,823.48
Sep-94 16,015.98 17,899.08
Dec-94 16,083.04 17,963.26
Mar-95 16,790.08 18,808.53
Jun-95 18,023.72 19,975.47
Sep-95 18,538.13 20,327.70
Dec-95 19,598.25 21,256.22
Mar-96 18,947.54 20,775.73
Jun-96 18,968.82 20,873.51
Sep-96 19,346.47 21,226.26
Dec-96 19,845.79 21,845.58
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of U.S. Government
Series on December 31, 1986, and reflects deduction of the 4.75% sales load. On
December 31, 1996, the value of your investment in the Series' Class A shares
(with dividends reinvested) would have grown to $19,846. By comparison, the same
$10,000 investment would have grown to $21,846 based on the performance of the
Lehman Brothers Government Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Government Bond Index is made up of all public obligations
of the U.S. Treasury, excluding flower bonds and foreign-targeted issues, all
publicly issued debt of U.S. Government agencies and quasi-federal corporations,
and corporate debt guaranteed by the U.S. Government. Investments cannot be made
directly in an index.
U.S. GOVERNMENT SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES CLASS B SHARES
1 Year -3.59% 1 Year -4.97%
5 Years 5.19% Since Inception 1.95%
10 Years 7.10% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
4
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MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
LIMITED MATURITY BOND SERIES
In its second year of existence the Limited Maturity Bond Series is doing what
it was designed to do--provide lower volatility and downside protection than
longer-maturity funds in periods of rising interest rates. In a year in which
the thirty-year Treasury bond had a total return of -2.3%, the portfolio's total
return of 2.09% looked quite good.(1)
USE OF MORTGAGE-BACKED SECURITIES IN THE PORTFOLIO
One way to reduce volatility without sacrificing the income stream is through
the use of certain mortgage-backed securities, which make up just over 20% of
the portfolio. Our strategy in this portion of the Limited Maturity portfolio
has been to combine seasoned premium mortgage-backed issues having coupons in
the 8% to 9% range with other lower-coupon discounted issues which we consider
to be undervalued. The combination of these two provides both defensive price
movement characteristics in periods of modest interest rate fluctuations and
yields generally 1/2 to 1% higher than Treasury bonds.
CORPORATE HOLDINGS IN THE FUND
In the investment grade corporate bond portion of the portfolio we are using
fewer "Yankee" bonds (dollar-denominated issues of foreign companies) than in
the other fixed income funds, and buying more domestic industrial issues. These
bonds, issued by companies such as Aluminum Company of America and Ford Motor
Company, have historically shown less price volatility than bonds in the finance
and utility sectors of the market.
The high yield portion, currently about 18% of the fund, will generally provide
a substantial income stream to enhance the total return. In the fourth quarter
of 1996, however, performance was hurt by our Marvel Holdings, Inc. bonds which
declined substantially in value after the company announced much lower than
expected earnings, coupled with liquidity problems. We sold the bonds in early
December and the company subsequently filed for bankruptcy protection. Another
high yield issue, Home Holdings, also lost considerable value and hurt overall
performance. The significant performance drag created by these two issues has
led us to take steps to lessen the impact of any future events in the high yield
sector by limiting each holding to 1% or less of the total portfolio. We will
continue to concentrate on the upper-tier rating brackets of the high yield
market.
OUTLOOK FOR 1997
We believe that in 1997 interest rates will continue to fluctuate, although
probably not as widely as in 1996. We plan to continue the volatility-reducing
strategies outlined above, possibly selling some of the longer maturity issues
in the portfolio as well. If 1997 turns out to have total returns in an average
range of 5% to 7%, the strong income component will contribute a greater part of
the return than will price appreciation.
Greg Hamilton, Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge.
LIMITED MATURITY BOND SERIES
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
LIMITED MATURITY LEHMAN BROTHERS
BOND SERIES INTERMEDIATE TERM
CORPORATE BOND INDEX
10,000.00 10,000.00
Jan-95 9,552.38 10,192.00
Feb-95 9,748.77 10,464.13
Mar-95 9,798.38 10,533.19
Apr-95 9,932.95 10,695.40
May-95 10,300.75 11,103.97
Jun-95 10,358.89 11,193.91
Jul-95 10,309.05 11,180.47
Aug-95 10,403.62 11,319.11
Sep-95 10,487.92 11,424.38
Oct-95 10,523.63 11,559.19
Nov-95 10,658.84 11,752.23
Dec-95 10,762.43 11,901.48
Jan-96 10,898.96 12,012.16
Feb-96 10,777.01 11,819.97
Mar-96 10,705.57 11,734.86
Apr-96 10,650.01 11,667.98
May-96 10,642.59 11,649.31
Jun-96 10,742.60 11,792.59
Jul-96 10,772.03 11,822.08
Aug-96 10,771.66 11,817.35
Sep-96 10,964.75 12,022.97
Oct-96 11,017.89 12,288.68
Nov-96 11,056.54 12,497.58
Dec-96 10,987.43 12,375.11
$10,000 OVER THE LIFE OF THE SERIES
This chart assumes a $10,000 investment in Class A shares of Limited Maturity
Bond Series on January 17, 1995 (date of inception), and reflects deduction of
the 4.75% sales load. On December 31, 1996, the value of your investment in the
Series' Class A shares (with dividends reinvested) would have grown to $10,987.
By comparison, the same $10,000 investment would have grown to $12,375 based on
the performance of the Lehman Intermediate Term Corporate Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Intermediate Term Corporate Bond Index includes all
corporate debt securities rated A or higher. Investments cannot be made directly
in an index.
LIMITED MATURITY BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES
One Year -2.74%
Since Inception 1-17-95 4.94%
CLASS B SHARES
One Year -3.95%
Since Inception 1-17-95 4.68%
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
5
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
GLOBAL AGGRESSIVE BOND SERIES
1996 was a very rewarding year for our shareholders, particularly during the
second half. While the first six months provided a total return of 2.58%, the
last six months' strong performance brought the total return of the fund for the
year up to 11.56%.(1) This compares favorably with the Lehman Brothers Global
Bond Index return of 5.37% for the year, a 0.2% return for a ten-year U.S.
Treasury note, and 10.4% average for the Lipper peer group.
INTERNATIONAL STRENGTH IN THE SECOND HALF
The second half of 1996 saw an acceleration of the trends which began earlier in
the year. Yields in peripheral European countries such as Spain, Italy, and
Portugal, which had fallen approximately 1% in the first half of the year,
declined a further 2% in the second half. Restrictive fiscal policies by these
governments brought about by their desire not to be left out of the European
Monetary Union process combined with rapidly declining inflation to produce
these dramatic declines in yields. While there is still room for this trend to
continue, we believe the majority of this convergence of yields with "core"
Europe is coming to an end.
Emerging market debt also continued its good performance. With the strongest
concentration of economic growth in the world, the credit quality of many
emerging market countries and companies is increasing and should continue on
that path in 1997.
DOLLAR BLOC PERFORMANCE
One of the differences in the second half of 1996 versus the first half is that
the dollar bloc which includes Australia, Canada, New Zealand and the United
States also performed very well. Interest rates, which had increased in these
countries in the first half on the back of a poor U.S. market, reversed their
upward trend. While longer term rates in the U.S. managed to decline slightly,
yields in the rest of the dollar bloc fell substantially, on the order of 1% to
1.5%. Recognition of the continued trend of low inflation in these countries was
the main contributing factor to the decline in yields.
OUTLOOK FOR 1997
Looking ahead to 1997, we believe that the most rewarding investments will be
those that seek out improving credit quality situations, both on the country and
company level. In particular, the return of strong growth to Latin America
should provide fertile ground for many of these opportunities. We look forward
to the challenges of the new year.
Maria Fiorini Ramirez and Denis P. Jamison
Portfolio Managers
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge.
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
[MFR LOGO] [LEXINGTON LOGO]
GLOBAL AGGRESSIVE BOND SERIES
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
GLOBAL AGGRESSIVE LEHMAN BROTHERS
BOND SERIES GLOBAL BOND INDEX
10,000.00 10,000.00
Jun-95 9,485.71 10,069.00
Jul-95 9,619.05 10,140.49
Aug-95 9,609.52 9,907.26
Sep-95 9,851.18 10,131.16
Oct-95 9,920.00 10,257.80
Nov-95 9,969.16 10,367.56
Dec-95 10,220.30 10,521.00
Jan-96 10,401.55 10,427.36
Feb-96 10,169.96 10,358.54
Mar-96 10,217.42 10,338.86
Apr-96 10,258.45 10,293.37
May-96 10,350.78 10,318.07
Jun-96 10,484.82 10,428.48
Jul-96 10,684.03 10,613.06
Aug-96 10,851.78 10,651.27
Sep-96 10,978.22 10,731.15
Oct-96 11,127.87 10,964.02
Nov-96 11,384.42 11,128.48
Dec-96 11,403.45 11,086.19
$10,000 OVER THE LIFE OF THE SERIES
This chart assumes a $10,000 investment in Class A shares of Global Aggressive
Bond Series on June 1, 1995 (date of inception), and reflects deduction of the
4.75% sales load. On December 31, 1996, the value of your investment in the
Series' Class A shares (with dividends reinvested) would have grown to $11,403.
By comparison, the same $10,000 investment would have grown to $11,086 based on
the performance of the Lehman Brothers Global Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Global Bond Index includes local currency-denominated
sovereign debt of 19 countries plus European Currency Units-denominated debt.
Investment cannot directly be made in an index.
GLOBAL AGGRESSIVE BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES
One Year 6.24%
Since Inception (6-1-95) 8.63%
CLASS B SHARES
One Year 5.67%
Since Inception (6-1-95) 8.78%
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
6
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
HIGH YIELD SERIES
The High Yield Series began operations August 5, 1996 with a primary objective
of seeking high current income with a secondary objective of capital
appreciation. Although the Series may invest in debt issues in any rating
category below investment grade, our current focus is on issues rated BB or B,
in the upper tier of the noninvestment grade range. Given the length of the
current economic expansion in the United States, the possibility is increasing
that we may experience a slowdown in the months to come. If this happens, the
higher-rated high yield issues are likely to outperform their lower-rated
counterparts because of their stronger balance sheets.
LARGEST INDUSTRY REPRESENTATIONS
The largest industry concentration in the portfolio is in consumer goods, both
cyclical and noncyclical. Many of the issuers will be familiar to our
shareholders, including cyclical ones such as sheet and towel manufacturer
Westpoint-Stevens, Inc., cable providers Rogers Cablesystems Ltd. and Century
Communications, and gaming company Showboat, Inc. Others may be less familiar by
name, but their services are well-known: one example is K-III Communications
Corporation, publishers of Weekly Reader, Seventeen magazine, and Funk &
Wagnalls dictionaries, among other products.
Among the consumer noncyclical companies in the portfolio is AMF Group, Inc.,
provider of bowling centers and equipment. AMF is currently designing new
bowling center packages for construction in emerging market countries where
industry penetration is low or nonexistent. Other consumer noncyclicals include
Carrols Corporation, the largest operator of Burger King franchises, and Cott
Corporation, which manufactures private-label soft drinks.
OTHER SECTORS IN THE PORTFOLIO
The portfolio at this time is underweighted in basic industries, especially
those whose assets are subject to commodity pricings, such as steel and paper
companies. The energy sector, where exploration and production companies have
excellent cash flows, is overweighted in the portfolio versus the benchmark
Lehman Brothers High Yield Index, as are nonbank financial services companies.
The High Yield Series has gained a respectable 5.20% since its August
inception.(1) The performance was held back somewhat by our position in Marvel
Holdings, Inc. bonds, which declined substantially in value when the company
announced that they were experiencing liquidity problems. The bonds were sold
out of the portfolio in November, and have dropped considerably further in price
since then.
THE HIGH YIELD OUTLOOK IN 1997
As discussed earlier, our portfolio is higher in quality than many in our high
yield peer group. A number of the peer funds use common stock in their
portfolios, as well. In a bull market like we experienced in 1995 and 1996 those
portfolios may perform better, but with the likelihood of an economic slowdown
in the not-too-distant future, higher-rated issues should hold their value
better. We believe that the high yield bond markets are likely to have a good
year in 1997 relative to other fixed income asset classes, drawing a sizeable
part of their total return from their higher coupons.
Tom Swank
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge.
Investors should remember that while high yield bonds provide potentially higher
yields than many other types of bonds, they also present greater credit risk.
7
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
SECURITY TAX-EXEMPT FUND
Despite a year in which presidential candidates spoke frequently of tax cuts,
the tax-exempt market actually fared better than its Treasury and corporate
counterparts. Municipal bond investors may be realizing that in a time when a
balanced federal budget is receiving serious consideration, the likelihood of
relevant tax cuts is diminished.
MATURITY RESTRUCTURING EARLY IN 1996
At the beginning of 1996 the average duration of the bonds in the Security
Tax-Exempt Fund was quite long, at about 9.5 years. This hurt performance in
January and February as interest rates rose rapidly. We shortened the
portfolio's average maturity and duration over that time, and for the balance of
the year, it performed well in line with the benchmark index.
In order to lower the volatility of the portfolio, we have reduced the number of
issues that are subject to call risk. Callable bonds are ones which the issuers
can buy back when interest rates decline, replacing them with lower-coupon bonds
and lowering their interest expense. These issues can fluctuate widely in price
as general market levels move above or below the call price, alternately
reducing or increasing the likelihood that they will be called. Because of this
risk, callable bonds can often be purchased at a higher yield than noncallable
issues.
CREDIT RATINGS IN THE PORTFOLIO
To replace this higher yield, we have opted to take a slightly greater credit
risk, purchasing some issues rated in the low-A to high BBB range. Some of these
include bonds issued by colleges and universities, such as dormitory revenue
bonds. We plan to buy smaller block sizes when we purchase these lower-rated
issues, to minimize the impact should any issue experience credit problems. We
plan to keep the average credit rating of the portfolio slightly higher than
that of our peer funds. We believe that as Congress moves to balance the federal
budget, many costs will be pushed down to the state and local government levels,
straining those municipalities' budgets. A higher average credit rating will
afford some degree of protection against unforseen problems.
CONGRESS AND TAX CUTS
As mentioned earlier, the likelihood of significant tax cuts for individuals in
1997 has been reduced by the perception that Congress is intent on presenting a
proposal that will balance the budget in the next five years. It will be easier
in a nonelection year to take politically unpopular steps such as cutting
entitlement programs without granting an offsetting--and
electorate-pleasing--favor such as reduced taxes. A climate in which tax rate
uncertainty is diminished is one which is favorable for performance of
tax-exempt bonds.
Greg Hamilton
Portfolio Manager
TAX-EXEMPT FUND
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
LEHMAN BROTHERS
TAX-EXEMPT FUND MUNICIPAL BOND INDEX
10,000.00 10,000.00
Mar-87 9,784.70 10,241.75
Jun-87 9,321.86 9,963.54
Sep-87 9,211.03 9,716.06
Dec-87 9,400.74 10,150.62
Mar-88 9,679.13 10,499.11
Jun-88 9,910.13 10,702.23
Sep-88 10,104.58 10,975.54
Dec-88 10,364.69 11,179.96
Mar-89 10,184.40 11,254.22
Jun-89 10,568.45 11,920.52
Sep-89 10,562.68 11,928.33
Dec-89 10,821.70 12,387.11
Mar-90 10,834.43 12,442.35
Jun-90 11,076.16 12,733.13
Sep-90 11,097.60 12,740.60
Dec-90 11,491.95 13,290.13
Mar-91 11,733.40 13,589.47
Jun-91 11,941.86 13,880.24
Sep-91 12,393.61 14,420.09
Dec-91 12,840.77 14,904.31
Mar-92 12,845.06 14,949.05
Jun-92 13,284.31 15,516.43
Sep-92 13,567.12 15,929.78
Dec-92 13,776.37 16,219.78
Mar-93 14,187.82 16,821.68
Jun-93 14,729.87 17,372.08
Sep-93 15,257.64 17,958.90
Dec-93 15,475.16 18,210.99
Mar-94 14,359.07 17,211.33
Jun-94 14,465.14 17,401.84
Sep-94 14,449.36 17,520.91
Dec-94 14,193.57 17,269.30
Mar-95 15,150.39 18,490.34
Jun-95 15,301.79 18,936.88
Sep-95 15,642.34 19,481.53
Dec-95 16,390.67 20,284.98
Mar-96 15,978.97 20,040.31
Jun-96 16,050.42 20,193.95
Sep-96 16,396.42 20,656.82
Dec-96 16,802.00 21,183.19
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Tax-Exempt Fund on
December 31, 1986, and reflects deduction of the 4.75% sales load. On December
31, 1996, the value of your investment in the Fund's Class A shares (with
dividends reinvested) would have grown to $16,802. By comparison, the same
$10,000 investment would have grown to $21,183 based on the performance of the
Lehman Brothers Municipal Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Municipal Bond Index is a total return performance benchmark
for the long-term, investment-grade tax-exempt bond market. Returns and
attributes are calculated semi-monthly using approximately 15,000 municipal
bonds. Investments cannot be made directly in an index.
TAX-EXEMPT FUND
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES CLASS B SHARES
1 Year -2.40% 1 Year -3.76%
5 Years 4.50% Since Inception 0.27%
10 Years 5.33% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
8
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
SECURITY CASH FUND
Money market funds in 1996 became attractive alternatives for fixed-income
investors, outperforming many sectors of the bond market. Security Cash Fund
returned 4.63% over the year, approximating its Lipper peer group average of
4.80%.
AVERAGE MATURITY TARGET RANGE
One of our objectives throughout the year was to keep the average maturity of
the portfolio holdings within ten days of that published weekly in the
IBC/Donoghue Money Fund Report. We avoid the practice of skewing the average
maturity strongly, either shorter or longer than the benchmark average, in order
to try to outguess the Federal Reserve Bank and their interest rate movements.
We believe that a more conservative approach is appropriate in our money market
funds.
SECTOR REPRESENTATION IN THE PORTFOLIO
We have been adding blocks of Small Business Administration mortgage pools with
interest rates which reset monthly or quarterly based on the prime rate. These
AAA-rated issues provide better yields than commercial paper, and they are U.S.
Government securities, so there is no additional credit risk in buying them. The
greatest risk with these instruments is that the mortgages will be prepaid at a
faster-than-anticipated rate. For this reason we choose to only buy issues
priced at par, so that no premium will be lost in the event of escalated
prepayments. Our SBA holdings now make up about 13% of the portfolio.
We have also increased our holdings of government agency issues such as Federal
Farm Credit Banks, Federal Home Loan Banks and Federal National Mortgage
Association securities. These issues, with maturities of one year or less,
provide diversification from the larger position in commercial paper in the
portfolio. The IBC/Donoghue average portfolio position in commercial paper is
about 60%; we have reduced ours from almost 80% to the current 60% in order to
be more in line with that average.
LOOKING AHEAD TO 1997
In 1996 we established an overnight funds account with the Federal Home Loan
Bank in order to maximize our earnings on cash balances. We continue to study
various investment alternatives for the portfolio assets in order to provide
competitive interest rates in the fund.
We expect interest rates on short term fixed income investments to stay within a
narrow band in 1997. When inflation has been modest, as it has for the last two
years, hints of escalating economic growth cause greater fluctuations in the
longer maturities of the bond markets than in the short ones. We continue to
strive to provide a high quality portfolio with a competitive yield for our
shareholders.
Barbara Davison
Fixed Income Team
The Security Cash Fund is neither insured nor guaranteed by the U.S. Government
and there is no assurance that the fund will be able to maintain a stable net
asset value of $1.00 per share.
9
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
CORPORATE BOND SERIES
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
AIR TRANSPORTATION - 4.6%
$2,000,000 Southwest Airlines Company, 7.875% - 2007 .......... $2,117,500
1,200,000 United Airlines, 11.21% - 2014 ..................... 1,557,000
----------
3,674,500
BANKS - 14.1%
ABN AMRO Bank NV,
1,000,000 7.55% - 2006 ..................................... 1,036,250
1,500,000 7.30% - 2026 ..................................... 1,428,750
1,250,000 Abbey National PLC, 6.69% - 2005 ................... 1,226,563
1,000,000 BCH Cayman Islands, Ltd., 7.70% - 2006 ............. 1,032,500
1,500,000 Bank of New York, Inc., 6.50% - 2003 ............... 1,473,750
2,000,000 Bankers Trust of New York Corporation, 7.125% - 2006 1,997,500
1,000,000 Maylayan Banking Berhad New York, 7.125% - 2005 .... 993,750
2,150,000 Santander Financial Issuances, Ltd., 7.00% - 2006 .. 2,136,563
----------
11,325,626
BROKERS, DEALERS & SERVICES - 6.6%
4,000,000 Bear Stearns Companies, Inc., 5.75% - 2001 ......... 3,860,000
1,450,000 Lehman Brothers, Inc., 7.25% - 2003 ................ 1,457,250
----------
5,317,250
CABLE SYSTEMS - 4.5%
1,750,000 Rogers Cablesystems, Ltd., 9.625% - 2002 ........... 1,833,125
2,000,000 TCI, 7.875% - 2013 ................................. 1,825,000
----------
3,658,125
CONSUMER GOODS & SERVICES - 2.6%
1,000,000 Semi-Tech Corporation, 0% - 2003(4) ................ 657,500
1,500,000 Nike, Inc., 6.375% - 2003 ......................... 1,471,875
----------
2,129,375
ELECTRONICS - 1.9%
1,500,000 Pioneer Standards Electronics, Inc., 8.50% - 2006 .. 1,526,250
ENTERTAINMENT - 5.4%
1,650,000 Harrah's Operating Company, Inc., 8.75% - 2000 ..... 1,685,063
750,000 Showboat, Inc., 13.50% - 2003 ...................... 826,875
1,800,000 Station Casinos, Inc., 10.125% - 2006 .............. 1,804,500
----------
4,316,438
FINANCE - 1.2%
$1,000,000 Countrywide Capital, 8.00% - 2026 .................. $987,500
FOOD & BEVERAGES - 4.2%
1,250,000 Chiquita Brands International, Inc., 10.25% - 2006 . 1,331,250
1,000,000 Coca-Cola Enterprises Inc., 6.70% - 2036(5) ........ 1,010,000
1,000,000 Panamerican Beverages, Inc., 8.125% - 2003 ......... 1,025,000
----------
3,366,250
FUNERAL HOMES - 2.2%
1,750,000 Loewen Group International, Inc., 8.25% - 2003 ..... 1,771,875
INSURANCE - 4.0%
1,250,000 American RE Corporation, 7.45% - 2026 .............. 1,248,438
2,200,000 Home Holdings, Inc., 7.75% - 1998 .................. 968,000
1,050,000 Travelers Capital Trust, 7.75% - 2036 .............. 1,018,500
----------
3,234,938
MEDIA - 3.8%
1,750,000 Time Warner, Inc., 9.125% - 2013 ................... 1,883,438
1,250,000 Viacom, Inc., 8.00% - 2006 ......................... 1,215,625
----------
3,099,063
MISCELLANEOUS - 7.5%
3,575,527 Bear Stearns Mortgage Securities, Inc.,
7.75% - 2024 CMO ................................. 3,460,719
1,322,553 GE Capital Mortgage Services, Inc., 8.30% - 2023 CMO 1,345,113
1,250,000 Securitized Asset Sales, Inc., 7.50% - 2025 CMO .... 1,250,110
----------
6,055,942
MOTOR VEHICLES - 5.0%
2,000,000 Chrysler-Auburn Hills Trust, 12.00% - 2020 ......... 3,017,500
1,000,000 Ford Motor Company, 7.25% - 2008 ................... 1,010,000
----------
4,027,500
NATURAL GAS COMPANIES - 1.2%
1,000,000 El Paso Natural Gas Company, 6.75% - 2003 .......... 992,500
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
10
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
CORPORATE BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
OIL & GAS COMPANIES - 2.6%
$1,000,000 Seagull Energy Corporation, 8.625% - 2005 .......... $1,037,500
1,000,000 Union Pacific Resources, 7.50% - 2026 .............. 1,017,500
----------
2,055,000
PAPER & LUMBER PRODUCTS - 1.7%
1,250,000 Domtar, Inc., 9.50% - 2016 ......................... 1,371,875
PUBLISHING & PRINTING - 2.6%
375,000 Golden Books Publishing, Inc., 7.65% - 2002 ........ 338,438
1,700,000 Valassis Inserts, Inc., 9.375% - 1999 .............. 1,751,000
----------
2,089,438
REAL ESTATE - 1.9%
820,000 Chelsea GCA Realty, Inc., 7.75% - 2001 ............. 837,425
750,000 Simon DeBartolo Group, Ltd., 6.875% - 2006 ......... 729,375
----------
1,566,800
WASTE MANAGEMENT - 1.3%
1,000,000 Waste Management, 7.10% - 2026(5) .................. 1,030,000
STEEL & METAL PRODUCTS - 1.0%
750,000 AK Steel Corporation, 10.75% - 2004 ................ 817,500
TELECOMMUNICATION EQUIPMENT - 3.9%
3,000,000 Comsat Corporation, 8.125% - 2004 .................. 3,168,750
----------
Total corporate bonds--Corporate
Bond Series - 83.8% .............................. 67,582,495
GOVERNMENT & GOVERNMENT AGENCY SECURITIES
-----------------------------------------
U.S. Government Agencies - 8.8%
Federal Home Loan Mortgage Corporation,
1,500,000 7.974% - 2005 .................................... 1,508,940
751,931 8.80% - 2020 CMO ................................. 768,652
750,000 9.00% - 2020 CMO ................................. 763,009
750,000 6.50% - 2021 CMO ................................. 683,749
929,897 7.00% - 2021 CMO ................................. 854,822
Federal National Mortgage Association,
1,500,000 0% - 2004(4) ..................................... 1,472,085
989,433 9.30% - 2019 CMO ................................. 1,011,628
----------
7,062,885
PRINCIPAL
AMOUNT OR
NUMBER OF GOVERNMENT & GOVERNMENT MARKET
SHARES AGENCY SECURITIES VALUE
- --------------------------------------------------------------------------------
U.S. TREASURY NOTES - 1.2%
$1,000,000 5.625% - 1998 .................................... $995,390
----------
Total government & government agency securities -
Corporate Bond Series - 10.0% .................... 8,058,275
PREFERRED STOCK
------------------------------------------
ELECTRIC COMPANIES - 0.1%
3,100 Georgia Power Capital Trust, $1.9375 ............... 77,500
----------
Total preferred stock--Corporate Bond Series - 0.1%. 77,500
----------
Total investments - Corporate Bond Series - 93.9% .. 75,718,270
Cash and other assets, less liabilities - 6.1% ..... 4,945,375
----------
Total net assets - Corporate Bond Series - 100.0% .. $80,663,645
==========
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES
U.S. GOVERNMENT & GOVERNMENT AGENCY SECURITIES
----------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 8.2%
$700,000 7.125% - 2001 .................................... $710,731
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 32.3%
$600,000 7.40% - 2004 ..................................... 630,168
$500,000 6.69% - 2011 ..................................... 477,420
$1,000,000 8.10% - 2019 ..................................... 1,121,370
$500,000 8.28% - 2025 ..................................... 578,175
----------
2,807,133
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 34.9%
$680,151 8.50% - 2024 ..................................... 707,105
$694,219 7.75% - 2025 ..................................... 701,371
$819,474 8.00% - 2026 ..................................... 832,013
$264,386 8.25% - 2026 ..................................... 271,822
$522,929 7.50% - 2034 ..................................... 520,494
----------
3,032,805
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
11
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES (CONTINUED)
PRINCIPAL U.S. GOVERNMENT & GOVERNMENT MARKET
AMOUNT AGENCY SECURITIES (CONTINUED) VALUE
- --------------------------------------------------------------------------------
U.S. TREASURY NOTES - 15.0%
$810,000 7.25% - 1998 ..................................... $823,090
460,000 8.00% - 1999 ..................................... 481,717
----------
1,304,807
U.S. TREASURY BONDS - 7.7%
600,000 8.75% - 2008 ..................................... 674,448
----------
Total investments - U.S. Government Series - 98.1% . 8,529,924
Cash and other assets, less liabilities - 1.9% ..... 167,475
----------
Total net assets - U.S. Government Series - 100.0% . $8,697,399
==========
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES
CORPORATE BONDS
------------------------------------------
ALUMINUM - 2.7%
$148,000 Alcan Aluminum, Ltd., 9.20% - 2001 ................. $152,810
AUTOMOBILE REPAIR - 2.8%
150,000 Speedy Muffler King, Inc., 10.875% - 2006 .......... 160,500
BANKS - 2.1%
110,000 First Union Corporation, 8.125% - 2002 ............. 117,563
CABLE - 5.0%
125,000 Paging Network, 10.00% - 2008 ...................... 126,406
150,000 Rogers Cablesystems, Ltd., 9.625% - 2002 ........... 157,125
----------
283,531
CONSUMER GOODS - 2.2%
125,000 Cole National Group, Inc., 9.875% - 2006 ........... 128,750
ELECTRIC COMPANIES - 2.6%
150,000 Consolidated Edison Company of New York,
6.625% - 2002 .................................... 150,000
ELECTRIC & GAS COMPANIES - 2.8%
150,000 Public Service Electric & Gas Company, 8.75% - 1999. 157,875
ELECTRONICS - 3.6%
200,000 Pioneer Standard Electronics, Inc., 8.50% - 2006 ... 203,500
FINANCE - 10.9%
$150,000 Ford Motor Credit Company, 8.375% - 2000 ........... $157,688
150,000 Household Finance Corporation, 8.00% - 2004 ........ 159,750
150,000 International Lease Finance Corporation,
8.25% - 2000 ..................................... 157,125
150,000 MCN Investment Corporation, 6.32% - 2003 ........... 147,000
----------
621,563
FOOD & BEVERAGE TRADE - 1.8%
100,000 FEMSA Fomento Economico Mexicano SA, 9.50% - 1997 .. 101,375
INSURANCE - 3.3%
100,000 Home Holdings, Inc., 7.75% - 1998 .................. 44,000
150,000 Travelers Capital Trust, 7.75% - 2036 .............. 145,500
----------
189,500
MISCELLANEOUS - 4.0%
122,860 GE Capital Mortgage Services, Inc., 8.30% - 2023 CMO 124,956
100,000 Sears Mortgage Securities Corporation,
8.50% - 2022 CMO ................................. 102,959
----------
227,915
NATURAL GAS COMPANIES - 6.3%
200,000 El Paso Natural Gas Company, 6.75% - 2003 .......... 198,500
150,000 Vastar Resources, Inc., 8.75% - 2005 ............... 162,938
----------
361,438
OIL & GAS COMPANIES - 2.7%
150,000 Seagull Energy Corporation, 8.625% - 2005 .......... 155,625
PUBLISHING & PRINTING - 1.8%
100,000 Valassis Inserts, Inc., 9.375% - 1999 .............. 103,000
RETAIL TRADE - 2.7%
150,000 Wal-Mart Stores, Inc., 7.50% - 2004 ................ 156,563
SANITARY SERVICES - 2.8%
150,000 WMX Technologies, Inc., 8.25% - 1999 ............... 157,313
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
12
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
TOBACCO PRODUCTS - 2.8%
$150,000 Dimon, Inc., 8.875% - 2006 ......................... $156,938
----------
Total corporate bonds - Limited Maturity
Bond Series - 62.9% .............................. 3,585,759
GOVERNMENT & GOVERNMENT AGENCY SECURITIES
------------------------------------------
CANADIAN GOVERNMENT AGENCIES - 2.9%
150,000 Province of Quebec, 8.625% - 2005 .................. 164,813
U.S. GOVERNMENT AGENCIES - 24.0%
Federal Home Loan Mortgage Corporation,
200,000 8.00% - 2020 CMO ................................. 203,089
44,000 8.50% - 2020 CMO ................................. 45,408
186,000 8.00% - 2024 ..................................... 189,348
Federal National Mortgage Association,
200,000 0% - 2004(4) ..................................... 196,278
150,000 8.50% - 2005 ..................................... 157,602
126,040 5.70% - 2008 CMO ................................. 120,672
118,000 7.50% - 2019 CMO ................................. 118,563
100,000 7.00% - 2020 CMO ................................. 98,389
100,000 6.75% - 2021 CMO ................................. 98,703
160,487 6.50% - 2023 CMO ................................. 138,012
----------
1,366,064
----------
Total government & government agency securities -
Limited Maturity Bond Series - 26.9% ............. 1,530,877
----------
Total investments - Limited Maturity
Bond Series - 89.8% .............................. 5,116,636
Cash and other assets, less liabilities - 10.2% .... 582,273
----------
Total net assets - Limited Maturity
Bond Series - 100.0% ............................. $5,698,909
==========
SECURITY INCOME FUND
GLOBAL AGGRESSIVE BOND SERIES
PRINCIPAL MARKET
AMOUNT GOVERNMENT OBLIGATIONS VALUE
- --------------------------------------------------------------------------------
ARGENTINA - 4.5%
$225,000 Republic of Argentina, 9.25% - 2001 ................ $229,219
AUSTRALIA - 8.6%
250,000 Commonwealth of Australia, 9.00% - 2004(3) ......... 218,275
290,000 New South Wales Treasury Corporation,
6.50% - 2006(3) .................................. 213,347
----------
431,622
BRAZIL - 4.0%
$275,342 Government of Brazil C, 4.50% - 2014 ............... 203,496
COSTA RICA - 4.7%
$300,000 Banco Costa Rica, 6.25% - 2010 ..................... 238,500
DOMINICAN REPUBLIC - 3.8%
$250,000 Central Bank of Dominican Republic, 6.375% - 2024 .. 190,625
GREECE - 4.1%
50,000,000 Hellenic Republic, 14.00% - 2003(3) ................ 205,525
HUNGARY - 3.8%
30,000,000 Government of Hungary, 21.00% - 1999(3) ............ 189,372
JORDAN - 2.9%
$250,000 Kingdom of Jordan, 4.00% - 2023 .................... 148,125
NEW ZEALAND - 4.1%
300,000 New Zealand Government, 6.50% - 2000(3) ............ 208,929
POLAND - 7.3%
1,120,000 Government of Poland, 16.00% - 1998(3) ............. 369,024
PORTUGAL - 8.8%
Obrig Do Tes Medio Prazo,
20,000,000 11.875% - 2000(3) ................................ 149,895
35,000,000 11.875% - 2005(3) ................................ 295,546
----------
445,441
SOUTH AFRICA - 3.5%
1,000,000 Republic of South Africa, 12.00% - 2005(3) ......... 174,846
SPAIN - 3.7%
20,000,000 Bonos Y Oblig Del Estado, 10.15% - 2006(3) ......... 187,661
----------
Total government obligations - Global Aggresive
Bond Series - 63.8% .............................. 3,222,385
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
13
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
GLOBAL AGGRESSIVE BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
CANADA - 9.8%
$237,000 CHC Helicopter, 11.50% - 2002 ...................... $242,925
100,000 Roger's Communication, Inc., 10.50% - 2006(3) ...... 76,161
200,000 Stelco, Inc., 10.40% - 2009(3) ..................... 172,465
----------
491,551
CZECH REPUBLIC - 4.4%
2,500,000 CEZ, A.S., 11.30% - 2005(3) ........................ 92,809
3,500,000 Skofin, S.R.O., A.S., 11.625% - 1998(3) ............ 129,187
----------
221,996
DENMARK - 6.3%
1,000,000 Nykredit, 7.00% - 2026(3) .......................... 159,606
1,000,000 Realkredit Danmark, 7.00% - 2026(3) ................ 158,894
----------
318,500
THAILAND - 4.3%
5,200,000 Italian-Thai Development Company, 12.50% - 2005(3) . 218,374
----------
Total corporate bonds - Global Aggressive
Bond Series - 24.8% .............................. 1,250,421
SHORT-TERM INVESTMENTS
------------------------------------------
INDONESIA - 6.1%
500,000,000 Asia Pulp & Paper, 0% - 4-29-97(3) ................. 201,594
250,000,000 Chase Manhattan Bank Time Deposit,
14.00% - 1-16-97(3) .............................. 105,820
----------
307,414
----------
Total short term investments - Global
Aggressive Bond Series - 6.1% .................... 307,414
----------
Total investments - Global Aggressive
Bond Series - 94.7% .............................. 4,780,220
WRITTEN OPTIONS - (0.1%)
$275,342 Call Option on Government of Brazil
C Bond, strike price 72.75 USD, 1-97
(premium $3,050) ................................. (5,979)
Cash and other assets, less liabilities - 5.4% ..... 273,007
----------
Total net assets - Global Aggressive
Bond Series - 100.0% ............................. $5,047,248
==========
SECURITY INCOME FUND
HIGH YIELD BOND SERIES
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
APPAREL - 3.0%
$150,000 Tultex Corporation, 10.625% - 2005 ................. $163,312
AUTOMOBILES - 3.2%
170,000 Exide Corporation, 10.00% - 2005 ................... 177,225
BANKS & CREDIT - 1.9%
100,000 B.F. Saul Reit, 11.625% - 2002 ..................... 107,500
BEVERAGES - 3.7%
100,000 Cott Corporation, 9.375% - 2005 .................... 103,000
100,000 Delta Beverage Group, 9.75% - 2003 ................. 102,250
----------
205,250
BROADCAST MEDIA - 4.4%
135,000 Allbritton Communications Company, 11.50% - 2004 ... 143,100
100,000 Heritage Media Corporation, 8.75% - 2006 ........... 96,500
----------
239,600
CHEMICALS - 3.3%
170,000 Envirodyne Industries, Inc., 12.00% - 2000 ......... 180,837
CABLE SYSTEMS - 9.5%
100,000 Cablevision Systems Corporation, 10.75% - 2004 ..... 104,000
100,000 Century Communications, 9.50% - 2005 ............... 102,500
135,000 Comcast Corporation, 9.125% - 2006 ................. 138,037
170,000 Rogers Cablesystems, Ltd., 9.625% - 2002 ........... 178,075
----------
522,612
CONSUMER GOODS - 1.2%
100,000 Semi-Tech Corporation, 0% - 2003(4) ................ 65,750
ELECTRIC UTILITIES - 5.5%
135,000 AES Corporation, 10.25% - 2006 ..................... 145,800
150,000 Cal Energy Company Inc., 9.50% - 2006 .............. 154,500
----------
300,300
ENTERTAINMENT - 5.0%
180,000 Showboat, Inc., 9.25% - 2008 ....................... 177,075
100,000 Station Casinos, Inc., 10.125% - 2006 .............. 100,250
----------
277,325
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
14
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
HIGH YIELD BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
FINANCIAL SERVICES - 1.9%
$100,000 Dollar Financial Group, 10.875% - 2006 ............. $103,000
FOOD PROCESSING - 2.6%
135,000 TLC Beatrice International Holdings, 11.50% - 2005 . 143,100
HEALTH CARE SERVICES - 1.8%
100,000 Regency Health Services, 9.875% - 2002 ............. 101,250
MANUFACTURING - 3.8%
100,000 Sequa Corporation, 9.375% - 2003 ................... 101,000
100,000 Shop Vac Corporation, 10.625% - 2003 ............... 105,250
----------
206,250
MEDICAL - 1.9%
100,000 Maxxim Medical, 10.50% - 2006 ...................... 104,500
MISCELLANEOUS - 1.8%
100,000 Jordan Industries, 10.375% - 2003 .................. 98,750
OIL & GAS COMPANIES - 5.3%
135,000 Maxus Energy, 9.50% - 2003 ......................... 136,688
150,000 Seagull Energy Corporation, 8.625% - 2005 .......... 155,625
----------
292,313
PACKAGING & CONTAINERS - 1.9%
100,000 Plastic Containers, Inc., 10.00% - 2006 ............ 103,250
PETROLEUM - 1.9%
100,000 Crown Central Petroleum, 10.875% - 2005 ............ 102,125
PUBLISHING & PRINTING - 6.2%
170,000 Golden Books Publishing, Inc., 7.65% - 2002 ........ 153,425
180,000 KIII Communications Corporation, 10.625% - 2002 .... 189,000
----------
342,425
RECREATION - 1.9%
100,000 AMF Group, Inc., 10.875% - 2006 .................... 105,500
RESTAURANTS - 2.6%
135,000 Carrols Corporation, 11.50% - 2003 ................. 143,438
STEEL & METAL PRODUCTS- 0.9%
50,000 AK Steel Corporation, 9.125% - 2006 ................ 51,375
TEXTILES - 4.4%
$100,000 Pillowtex Corporation, 10.00% - 2006 ............... $104,000
$135,000 Westpoint Stevens, Inc., 9.375% - 2005 ............. 138,713
----------
242,713
TOBACCO PRODUCTS - 2.6%
$135,000 Dimon, Inc., 8.875% - 2006 ......................... 141,244
TRANSPORTATION - 6.0%
$135,000 Teekay Shipping Corporation, 8.32% - 2003 .......... 135,000
$175,000 Atlas Air, Inc., 12.25% - 2002 ..................... 194,031
----------
329,031
----------
Total corporate bonds- High Yield
Bond Series - 88.2% .............................. 4,849,975
PREFERRED STOCK
------------------------------------------
BANKING & CREDIT - 3.6%
1,750 First Nationwide Bank .............................. 200,375
----------
Total preferred stock - High Yield
Bond Series 3.6% ................................. 200,375
----------
Total investments - High Yield Bond Series - 91.8% . 5,050,350
Cash and other assets, less liabilities - 8.2% ..... 448,756
----------
Total net assets - High Yield Bond Series - 100.0% . $5,499,106
==========
SECURITY TAX-EXEMPT FUND
MUNICIPAL BONDS
------------------------------------------
CIVIC CENTER DEVELOPMENT REVENUE - 1.0%
$250,000 District of Columbia Redevelopment Washington D.C.
Sports Arena, 5.40% - 2000 ....................... $251,250
EDUCATION REVENUE - 22.7%
$1,000,000 Illinois Chicago School, Series A, 4.90% - 2005 .... 993,750
$480,000 Iowa Higher Education St. Ambrose, 5.75% - 2011 .... 463,200
$1,000,000 Island County Washington School District
South Whidbey, 6.75% - 2007 ...................... 1,148,750
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
15
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY TAX-EXEMPT FUND (CONTINUED)
PRINCIPAL MARKET
AMOUNT MUNICIPAL BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
EDUCATION REVENUE, CONTINUED
$1,000,000 Federal Way, Washington School District,
4.80% - 2007 ..................................... $967,500
500,000 Mukwanago, Wisconsin School District, 5.00% - 2004 . 506,250
1,000,000 North Brunswick Township, New Jersey Board
of Education, 6.30% - 2013 ....................... 1,066,250
500,000 Northfield, Minnesota School District #659,
4.80% - 2007 ..................................... 490,000
----------
5,635,700
ELECTRIC UTILITY REVENUE - 17.5%
1,000,000 Georgia Municipal Electric Authority, 5.25% - 2025 . 941,250
1,200,000 Massachusetts Municipal Wholesale Electric Company
Power Supply System, Series B, 6.625% - 2004 ..... 1,299,000
1,000,000 Nebraska Public Power District Revenue,
Series A, 6.25% - 2022 ........................... 1,032,500
1,000,000 Washington Public Power Supply System Revenue
Nuclear Project #2, 6.30% - 2012 ................. 1,068,750
----------
4,341,500
GENERAL OBLIGATION - 16.7%
1,000,000 Clark County, Nevada School District, Series A,
5.50% - 2016 ..................................... 986,250
1,000,000 Dade County Florida, 5.75% - 2001 .................. 1,050,000
1,000,000 State of Illinois, 6.10% - 2003 .................... 1,073,750
1,000,000 Tulsa, Oklahoma, 5.125% - 2000 ..................... 1,021,250
----------
4,131,250
HIGHWAY REVENUE - 5.9%
1,400,000 Harris County, Texas, Series A, Toll Road & Tax,
6.125% - 2020 .................................... 1,475,250
POLLUTION CONTROL - 4.1%
1,000,000 Kansas City, Kansas General Motors Corporation
Project, 5.45% - 2006 ............................ 1,012,500
PORTS & HARBORS - 2.1%
500,000 Kansas City, Missouri Port Authority
Riverfront Park, 5.75% - 2005 .................... 513,125
SALES TAX REVENUE - 5.2%
1,300,000 Los Angeles, California, 5.625% - 2018 ............. 1,293,500
SEWER REVENUE - 17.1%
$1,000,000 DuPage County, Illinois Stormwater
Project Refunding, 5.60% - 2021 .................. $1,017,500
1,000,000 Houston, Texas Water & Sewer System
Revenue Series A, 6.20% - 2020 ................... 1,046,250
1,000,000 King County Washington Sewer
Revenue Series A, 6.25% - 2034 ................... 1,050,000
1,100,000 Los Angeles, CA Wastewater System
Revenue, 6.00% - 2014 ............................ 1,139,875
----------
4,253,625
VARIOUS PURPOSE REVENUE - 4.0%
1,000,000 Denver Metropolitan Major League Baseball Stadium
Project, 4.00% - 1999 ............................ 988,750
----------
Total investments - Tax-Exempt Fund - 96.3% ........ 23,896,450
Cash and other assets, less liabilities - 3.7% ..... 918,053
----------
Total net assets - Tax-Exempt Fund - 100.0% ........ $24,814,503
==========
SECURITY CASH FUND
COMMERCIAL PAPER
------------------------------------------
BROKERAGE - 2.8%
$1,277,000 Merrill Lynch & Company, Inc.,
5.34%, 1-15-97 ................................... $99,792
5.33%, 1-22-97 ................................... 722,746
5.35%, 2-4-97 .................................... 99,494
5.35%, 2-6-97 .................................... 350,117
----------
1,272,149
COMBINATION GAS & ELECTRIC - 4.7%
440,000 Baltimore Gas & Electric Company, 5.35%, 1-17-97 ... 438,954
700,000 Central Illinois Light Company, 5.85%, 1-13-97 ..... 698,635
1,000,000 Madison Gas & Electric Company, 5.40%, 1-15-97 ..... 997,900
----------
2,135,489
COMPUTER SYSTEMS - 4.0%
1,800,000 International Business Machines Corporation,
5.39%, 1-8-97 .................................... 998,952
5.31%, 2-24-97 ................................... 793,628
----------
1,792,580
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
16
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY CASH FUND (CONTINUED)
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER (CONTINUED) VALUE
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES - 11.0%
$100,000 Idaho Power Company, 6.15%, 1-16-97 ................ $99,744
1,611,000 Interstate Power Company,
5.37%, 1-14-97 ................................... 210,591
5.40%, 1-15-97 ................................... 399,160
5.55%, 2-19-97 ................................... 992,446
1,301,000 Massachusetts Electric Company,
6.05%, 1-2-97 .................................... 550,907
6.00%, 1-3-97 .................................... 749,750
2,000,000 Southern California Edison Company, 5.35%, 1-13-97 . 1,996,433
----------
4,999,031
ELECTRONICS - 4.4%
2,000,000 Avnet, Inc., 5.42%, 1-6-97 ......................... 1,998,494
ENGINEERING - 4.9%
2,250,000 Fluor Corporation, 5.37%, 1-29-97 .................. 2,240,603
FOOD PROCESSING - 1.5%
700,000 McCormick & Company, Inc., 5.31%, 1-10-97 .......... 699,071
INDUSTRIAL SERVICES - 2.7%
1,250,000 PPG Industries, Inc., 5.32%, 2-10-97 ............... 1,242,611
LEASING - 3.1%
1,400,000 International Lease Finance Corporation,
5.30%, 1-23-97 ................................... 1,395,466
NATURAL GAS - 1.9%
800,000 Bay State Gas Company, 5.35%, 1-24-97 .............. 797,266
POLLUTION CONTROL - 4.4%
2,000,000 Engelhard Corporation, 5.32%, 2-14-97 .............. 1,986,996
RETAIL--GROCERY - 4.5%
2,050,000 Winn-Dixie Stores, 5.38%, 1-28-97 .................. 2,041,728
TOBACCO - 4.4%
2,000,000 B.A.T. Capital Corporation, 5.38%, 1-17-97 ......... 1,995,218
WASTE - 5.9%
2,700,000 WMX Technologies, Inc., 5.40%, 1-24-97 ............. 2,690,685
----------
Total commercial paper - Cash Fund - 60.2% ......... 27,287,387
PRINCIPAL U.S.GOVERNMENT & GOVERNMENT MARKET
AMOUNT AGENCY SECURITIES VALUE
- --------------------------------------------------------------------------------
FEDERAL FARM CREDIT BANKS - 2.2%
$1,000,000 4.95%, 3-3-97 .................................... $997,031
FEDERAL HOME LOAN BANK - 4.4%
2,000,000 5.63%, 12-17-97 .................................. 2,000,000
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 6.6%
3,000,000 4.97%, 3-10-97 ................................... 2,998,077
SBA POOLS - 13.1%
1,853,960 6.50% - 2017(1) .................................. 1,871,455
1,129,571 5.875% - 2018(2) ................................. 1,133,807
944,512 5.875% - 2020(2) ................................. 944,512
989,217 5.75% - 2021(2) .................................. 989,836
976,265 5.75% - 2021(2) .................................. 976,875
----------
5,916,485
----------
Total U.S. government & government agency
securities - Cash Fund - 26.3% ................... 11,911,593
----------
Total investments - Cash Fund - 86.5% .............. 39,198,980
Cash and other assets, less liabilities - 13.5% .... 6,131,744
----------
Total net assets - Cash Fund - 100.0% .............. $45,330,724
==========
The identified cost of investments owned at December 31, 1996, was the same for
federal income tax and book purposes, except for the Corporate Bond Series for
which the identified cost for federal income tax purposes was $75,921,420.
CMO - (Collateralized Mortgage Obligation)
1 Variable rate security which may be reset the first of each month.
2 Variable rate security which may be reset the first of each quarter.
3 Principal amount on foreign bonds is reflected in local currency (e.g.,
Danish krone) while market value is reflected in U.S. dollars.
4 Deferred interest obligation; currently zero coupon under terms of initial
offering.
5 Put bond - a type of specialty bond that gives the holder the right to
redeem to the issuer at certain specified times before maturity.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
17
<PAGE>
BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY INCOME FUND
----------------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL HIGH SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE YIELD TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES BOND SERIES FUND FUND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (identified
cost $75,920,997, $8,368,335,
$5,053,086, $4,636,461, $4,903,283,
$23,444,597 and $11,911,593,
respectively) ..................... $75,718,270 $8,529,924 $5,116,636 $4,780,220 $5,050,350 $23,896,450 $11,911,593
Commercial paper, at amortized cost
which approximates market value ... -- -- -- -- -- -- 27,287,387
Cash ................................ 3,819,126 19,657 480,863 10,832 335,499 470,572 --
Receivables:
Fund shares sold .................. 3,058 2,955 4,664 176 323 226 6,253,739
Securities sold ................... 30,883 -- 1,724 110,392 -- -- 65,162
Interest .......................... 1,376,532 150,717 109,306 162,365 116,259 459,712 136,935
Security Management Company ....... 1,370 427 715 104 158 -- --
Prepaid expense ..................... 2,573 3,798 2,809 -- -- 9,129 13,303
Forward foreign exchange contracts .. -- -- -- 4,917 -- -- --
------------ ----------- ----------- ---------- ----------- ------------ ------------
Total assets ................. $80,951,812 $8,707,478 $5,716,717 $5,069,006 $5,502,589 $24,836,089 $45,668,119
============ =========== =========== ========== =========== ============ ============
LIABILITIES AND NET ASSETS
Liabilities:
Payable for fund shares redeemed .. $201,806 $-- $9,800 $-- $-- $-- $70,126
Dividends payable to shareholders . -- -- -- 1,460 -- -- 163,788
Written call options outstanding .. -- -- -- 5,979 -- -- --
Cash overdraft .................... -- -- -- -- -- -- 41,507
Other liabilities:
Management fees ................. 35,769 -- -- -- -- 10,762 24,897
12b-1 distribution plan fees .... 22,667 2,591 1,694 2,033 2,972 1,180 --
Custodian and transfer agent fees 10,725 4,304 3,165 3,316 80 1,353 11,529
Administration fees ............. 6,438 786 426 188 431 1,937 1,725
Professional fees ............... 4,502 1,094 2,427 942 -- 2,530 5,003
Miscellaneous ................... 6,260 1,304 296 7,840 -- 3,824 18,820
---------- ---------- ---------- ----------- ----------- ---------- ------------
Total liabilities ............ 288,167 10,079 17,808 21,758 3,483 21,586 337,395
Net Assets:
Paid in capital ..................... 93,223,300 9,514,029 5,704,923 4,885,064 5,387,903 25,834,978 45,330,724
Undistributed net investment
income (loss) ..................... -- 158 -- 117,348 721 5,559 --
Accumulated undistributed net realized
loss on sale of investments and
foreign currency transactions ..... (12,356,928) (978,377) (69,564) (99,652) (36,585) (1,477,887) --
Net unrealized appreciation
(depreciation) in value of investments
and translation of assets and
liabilities in foreign currency ... (202,727) 161,589 63,550 144,488 147,067 451,853 --
------------ ---------- ----------- ----------- ------------ ------------ ------------
Net assets ...................... 80,663,645 8,697,399 5,698,909 5,047,248 5,499,106 24,814,503 45,330,724
------------ ---------- ----------- ----------- ------------ ------------ ------------
Total liabilities and
net assets ................. $80,951,812 $8,707,478 $5,716,717 $5,069,006 $5,502,589 $24,836,089 $45,668,119
============ ========== =========== =========== ============ ============ ============
CLASS "A" SHARES
Capital shares outstanding .......... 10,681,022 1,704,844 486,912 338,604 181,468 2,397,740 45,330,724
Net assets .......................... $73,360,359 $8,036,075 $4,937,697 $3,506,595 $2,780,234 $23,304,115 $45,330,724
Net asset value per share (net assets
divided by shares outstanding) .... $6.87 $4.71 $10.14 $10.36 $15.32 $9.72 $1.00
Add: Selling commission
(4.75% of offering price)
(excluding Cash Fund) ............. 0.34 0.23 0.51 .52 .76 0.48 --
------------ ----------- ------------ ------------ ------------ ------------ ------------
Offering price per share
(net asset value
divided by 95.25%) ................ $7.21 $4.94 $10.65 $10.88 $16.08 $10.20 $1.00
============ =========== ============ ============ ============ ============ ============
CLASS "B" SHARES
Capital shares outstanding .......... 1,057,722 140,328 75,091 148,027 177,479 155,270 --
Net assets .......................... $7,303,286 $661,324 $761,212 $1,540,653 $2,718,872 $1,510,388 --
Net asset value per share
(net assets divided
by shares outstanding) ............ $6.90 $4.71 $10.14 $10.41 $15.32 $9.73 --
============ =========== ============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
18
<PAGE>
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY INCOME FUND
----------------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL HIGH SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE YIELD TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES BOND SERIES* FUND FUND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest .......................... $6,648,760 $761,589 $403,999 $575,957 $192,134 $1,362,359 $2,640,745
EXPENSES
Management fees ................... 440,214 55,727 26,161 34,900 12,264 120,946 247,304
Transfer/maintenance fees ......... 106,615 18,012 3,875 1,269 274 16,538 130,682
12b-1 distribution plan fees ...... 263,503 31,385 19,017 22,956 13,262 12,756 --
Administration fees ............... 79,239 9,690 4,638 41,952 1,920 22,530 21,721
Custodian fees .................... 12,146 4,600 4,478 10,519 462 1,345 8,824
Directors' fees ................... 8,940 1,122 520 385 -- 11,241 11,766
Professional fees ................. 1,746 -- 7,514 9,739 3,000 -- 3,131
Registration fees ................. 23,243 16,374 15,016 19,296 20,855 23,076 45,264
Other expenses .................... 14,200 1,267 1,105 1,444 709 4,092 16,556
------------ ----------- ------------ ----------- ------------ ------------ ------------
949,846 138,177 82,324 142,460 52,746 212,524 485,248
Less: Earnings credits applied .... (2,590) (1,365) (1,687) -- -- (1,345) (2,633)
Reimbursement of expenses ....... (10,663) (60,974) (27,868) (38,590) (12,264) (2,358) --
------------ ----------- ------------ ----------- ------------ ------------ ------------
Total expenses ............... 936,593 75,838 52,769 103,870 40,482 208,821 482,615
------------ ----------- ------------ ------------ ------------ ------------ ------------
Net investment income ...... 5,712,167 685,751 351,230 472,087 151,652 1,153,538 2,158,130
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss)
during the period on:
Investments ..................... (1,347,012) 182,946 (46,509) 133,869 (36,585) 56,324 --
Foreign currency transactions ... -- -- -- (174,582) -- -- --
------------ ----------- ------------ ----------- ------------- ------------ ------------
Net realized gain (loss) ...... (1,347,012) 182,946 (46,509) (40,713) (36,585) 56,324 --
Net change in unrealized
appreciation (depreciation)
during the period on:
Investments ................... (5,522,985) (735,463) (186,260) 71,369 147,067 (671,331) --
Translation of assets and
liabilities in foreign
currencies .................. -- -- -- 3,699 -- -- --
------------ ----------- ----------- ---------- ------------ ------------ ------------
Net unrealized appreciation
(depreciation) ................ (5,522,985) (735,463) (186,260) 75,068 147,067 (671,331) --
------------ ----------- ----------- ---------- ------------ ------------ ------------
Net gain (loss) ................. (6,869,997) (552,517) (232,769) 34,355 110,482 (615,007) --
------------ ----------- ----------- ---------- ------------ ------------ ------------
Net increase (decrease)
in net assets resulting
from operations ............. ($1,157,830) $133,234 $118,461 $506,442 $262,134 $538,531 $2,158,130
============ =========== =========== ========== ============ ============ ============
</TABLE>
*Period August 5, 1996 (inception) through December 31, 1996.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
19
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY INCOME FUND
----------------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL HIGH SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE YIELD TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES BOND SERIES* FUND FUND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income ............. $5,712,167 $685,751 $351,230 $472,087 $151,652 $1,153,538 $2,158,130
Net realized gain (loss) .......... (1,347,012) 182,946 (46,509) (40,713) (36,585) 56,324 --
Unrealized appreciation
(depreciation) during the period (5,522,985) (735,463) (186,260) 75,068 147,067 (671,331) --
----------- --------- ---------- ---------- ---------- ----------- ----------
Net increase (decrease) in
net assets resulting
from operations .............. (1,157,830) 133,234 118,461 506,442 262,134 538,531 2,158,130
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A ......................... (5,393,982) (655,579) (304,962) (210,236) (79,996) (1,107,445) (2,158,130)
Class B ......................... (343,417) (32,686) (47,156) (85,158) (70,935) (44,319) --
In excess of net realized gain
Class A ......................... -- -- -- (74,660) -- -- --
Class B ......................... -- -- -- (32,900) -- -- --
Tax return of capital
Class A ......................... -- -- (5,684) -- -- -- --
Class B ......................... -- -- (879) -- -- -- --
----------- --------- ---------- ---------- ---------- ----------- ----------
Total distributions to
shareholders ................ (5,737,399) (688,265) (358,681) (402,954) (150,931) (1,151,764) (2,158,130)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A ......................... 8,731,109 1,930,782 2,444,146 255,854 2,644,208 1,613,431 310,586,017
Class B ......................... 3,464,361 375,419 269,401 79,004 2,611,381 579,929 --
Dividends reinvested
Class A ......................... 4,241,649 543,532 284,749 283,688 79,998 626,193 1,969,086
Class B ......................... 304,987 26,151 47,452 110,636 70,935 31,495 --
Cost of shares redeemed
Class A ......................... (26,834,054) (3,998,800) (913,142) (66,489) (48) (3,379,177) (305,382,279)
Class B ......................... (1,793,517) (286,899) (267,281) (127,192) (18,571) (260,053) --
----------- --------- ---------- ---------- ---------- ----------- ----------
Net increase (decrease) from
capital share transactions .. (11,885,465) (1,409,815) 1,865,325 535,501 5,387,903 (788,182) 7,172,824
----------- --------- ---------- ---------- ---------- ----------- ----------
Total increase (decrease)
in net assets ............ (18,780,694) (1,964,846) 1,625,105 638,989 5,499,106 (1,401,415) 7,172,824
NET ASSETS:
Beginning of period ............... 99,444,339 10,662,245 4,073,804 4,408,259 -- 26,215,918 38,157,900
----------- ---------- ---------- ---------- ---------- ----------- -----------
End of period ..................... $80,663,645 $8,697,399 $5,698,909 $5,047,248 $5,499,106 $24,814,503 $45,330,724
=========== ========== ========== ========== ========== =========== ===========
Undistributed net investment
income .......................... $-- $158 $-- $117,348 $721 $5,559 $--
=========== ========== ========== ========== ========== =========== ===========
(a) Shares issued and redeemed:
Shares sold
Class A ................... 1,257,439 408,653 236,285 24,675 176,201 167,132 310,586,017
Class B ................... 497,238 79,022 25,885 7,907 174,028 59,521 --
Dividends reinvested
Class A ................... 608,432 115,124 27,590 27,930 5,270 65,031 1,969,086
Class B ................... 43,584 5,533 4,593 10,901 4,677 3,268 --
Shares redeemed
Class A ................... (3,860,010) (845,356) (88,496) (6,449) (3) (350,952) (305,382,279)
Class B ................... (256,329) (61,304) (25,864) (12,357) (1,226) (27,117) --
Net increase (decrease) ..... (1,709,646) (298,328) 179,993 52,607 358,947 (83,117) 7,172,824
=========== ========== ========== ========== ========== =========== ===========
</TABLE>
*Period August 5, 1996 (inception) through December 31, 1996.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
20
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SECURITY INCOME FUND
---------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES** FUND FUND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment income ............. $6,415,436 $574,999 $211,931 $243,325 $1,281,238 $2,516,770
Net realized gain (loss) .......... 2,922,105 22,802 (23,055) (36,350) 301,901 --
Unrealized appreciation during
the period ...................... 6,960,323 1,209,772 249,810 69,420 2,117,941 --
---------- --------- --------- --------- --------- ----------
Net increase in net assets
resulting from operations .. 16,297,864 1,807,573 438,686 276,395 3,701,080 2,516,770
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ......................... (6,158,758) (551,577) (177,005) (146,443) (1,241,504) (2,516,770)
Class B ......................... (255,751) (24,133) (34,039) (63,361) (39,808) --
In excess of net realized gain
Class A ......................... -- -- -- (5,311) -- --
Class B ......................... -- -- -- (2,584) -- --
---------- --------- --------- --------- --------- ----------
Total distributions
to shareholders ............. (6,414,509) (575,710) (211,044) (217,699) (1,281,312) (2,516,770)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A ......................... 7,438,108 2,385,671 3,092,500 4,109,884 2,787,651 347,493,190
Class B ......................... 2,180,877 240,748 681,901 1,354,123 370,386 --
Dividends reinvested
Class A ......................... 4,740,285 434,084 172,699 151,754 712,138 2,479,477
Class B ......................... 209,073 17,062 32,734 64,040 25,374 --
Cost of shares redeemed
Class A ......................... (18,496,662) (2,223,959) (129,283) (1,330,238) (4,896,869) (369,916,482)
Class B ......................... (981,865) (53,363) (4,389) -- (54,635) --
---------- --------- --------- --------- --------- ----------
Net increase (decrease) from
capital share transactions .. (4,910,184) 800,243 3,846,162 4,349,563 (1,055,955) (19,943,815)
---------- --------- --------- --------- --------- ----------
Total increase (decrease)
in net assets ........... 4,973,171 2,032,106 4,073,804 4,408,259 1,363,813 (19,943,815)
NET ASSETS:
Beginning of period ............... 94,471,168 8,630,139 -- -- 24,852,105 58,101,715
---------- ---------- --------- --------- ---------- ----------
End of period ..................... $99,444,339 $10,662,245 $4,073,804 $4,408,259 $26,215,918 $38,157,900
========== ========== ========= ========= ========== ==========
Undistributed net investment income . $19,734 $2,672 $887 ($8,314) $3,785 $--
========== ========== ========= ========= ========== ==========
(a) Shares issued and redeemed:
Shares sold
Class A ..................... 1,055,977 507,582 307,309 406,499 289,991 347,493,190
Class B ..................... 304,780 51,475 67,767 135,204 38,553 --
Dividends reinvested
Class A ..................... 673,772 93,100 16,505 15,098 74,305 2,479,477
Class B ..................... 29,519 3,639 3,127 6,372 2,642 --
Shares redeemed
Class A ..................... (2,613,704) (485,740) (12,281) (129,149) (510,770) (369,916,482)
Class B ..................... (139,145) (11,827) (417) -- (5,598) --
---------- ---------- --------- --------- ---------- ----------
Net increase (decrease) ....... (688,801) 158,229 382,010 434,024 (110,877) (19,943,815)
========== ========== ========= ========= ========== ==========
</TABLE>
* Period January 17, 1995 (inception) through December 31, 1995.
** Period June 1, 1995 (inception) through December 31, 1995.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
21
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
SELECTED DATA FOR EACH SHARE OF CAPITAL
STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Ratio
of Ratio
Net Divi- expen- of
Net gain Total dends Net Net ses net
Fiscal asset (loss) from (from Distri asset assets to income Port-
period value Net (real- invest- net butions value end of aver- to folio
ended begin- invest- ized & ment invest- (from Return Total end Total period age average turn-
Decem- ning of ment unreal- opera- ment capital of distri- of return (thou- net net over
ber 31 period income ized) tions income) gains) capital butions period (a) sands) assets assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BOND SERIES (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $7.68 $0.61 $0.044 $0.654 $(0.614) $-- $-- $(0.614) $7.72 9.0% $104,492 1.01% 7.97% 61%
1993 7.72 0.52 0.521 1.041 (0.527) (0.424) -- (0.951) 7.81 13.4% 118,433 1.02% 6.46% 157%
1994 7.81 0.49 (1.127) (0.637) (0.493) -- -- (0.493) 6.68 (8.3%) 90,593 1.01% 6.91% 204%
1995(d)(g) 6.68 0.47 0.708 1.178 (0.468) -- -- (0.468) 7.39 18.2% 93,701 1.02% 6.62% 200%
1996(d)(g) 7.39 0.47 (0.517) (0.047) (0.473) -- -- (0.473) 6.87 (0.5%) 73,360 1.01% 6.54% 292%
CORPORATE BOND SERIES (CLASS B)
1993(b) $8.59 $0.11 $(0.324) $(0.214) $(0.112) $(0.424) $-- $(0.536) $7.84 (2.5%) $1,022 1.88% 5.16% 164%
1994(c) 7.84 0.43 (1.129) (0.699) (0.431) -- -- (0.431) 6.71 (9.0%) 3,878 1.85% 6.08% 204%
1995(c)
(d)(g) 6.71 0.40 0.725 1.125 (0.405) -- -- (0.405) 7.43 17.3% 5,743 1.85% 5.80% 200%
1996(c)
(d)(g) 7.43 0.40 (0.517) (0.117) (0.413) -- -- (0.413) 6.90 (1.4%) 7,303 1.85% 5.70% 292%
U.S. GOVERNMENT SERIES (CLASS A)
1992(c) $5.17 $0.37 $(0.126) $0.244 $(0.366) $-- $(.008) $(0.374) $5.04 5.0% $9,364 1.11% 7.22% 157%
1993(c) 5.04 0.31 0.273 0.583 (0.310) (0.344) -- (0.654) 4.97 10.9% 10,098 1.10% 5.90% 153%
1994(c) 4.97 0.30 (0.621) (0.321) (0.299) -- -- (0.299) 4.35 (6.5%) 8,309 1.10% 6.47% 220%
1995(c)
(d)(g) 4.35 0.30 0.620 0.92 (0.30) -- -- (0.30) 4.97 21.9% 10,080 1.11% 6.41% 81%
1996(c)
(d)(g) 4.97 0.31 (0.256) 0.054 (0.314) -- -- (0.314) 4.71 1.3% 8,036 0.65% 6.44% 75%
U.S. GOVERNMENT SERIES (CLASS A)
1992(c) $5.17 $0.37 $(0.126) $0.244 $(0.366) $-- $(.008) $(0.374) $5.04 5.0% $9,364 1.11% 7.22% 157%
1993(c) 5.04 0.31 0.273 0.583 (0.310) (0.344) -- (0.654) 4.97 10.9% 10,098 1.10% 5.90% 153%
1994(c) 4.97 0.30 (0.621) (0.321) (0.299) -- -- (0.299) 4.35 (6.5%) 8,309 1.10% 6.47% 220%
1995(c)
(d)(g) 4.35 0.30 0.620 0.92 (0.30) -- -- (0.30) 4.97 21.9% 10,080 1.11% 6.41% 81%
1996(c)
(d)(g) 4.97 0.31 (0.256) 0.054 (0.314) -- -- (0.314) 4.71 1.3% 8,036 0.65% 6.44% 75%
U.S. GOVERNMENT SERIES (CLASS B)
1993(b)(c)$5.51 $0.04 $(0.193) $(0.153) $(0.043) $(0.344) $-- $(0.387) $4.97 (1.4%) $140 1.61% 5.54% 114%
1994(c) 4.97 0.26 (0.624) (0.364) (0.256) -- -- (0.256) 4.35 (7.4%) 321 1.85% 5.76% 220%
1995(c)
(d)(g) 4.35 0.26 0.625 0.885 (0.265) -- -- (0.265) 4.97 20.9% 582 1.87% 5.69% 81%
1996(c)
(d)(g) 4.97 0.25 (0.254) (0.004) (0.256) -- -- (0.256) 4.71 (0.02%) 661 1.86% 5.23% 75%
LIMITED MATURITY BOND SERIES (CLASS A)
1995(c)
(d)(e)(g)$10.00 $0.62 $0.652 $1.272 $(0.612) $-- $-- $(0.612) $10.66 13.0% $3,322 0.84% 5.97% 4%
1996(c)
(d)(g) 10.66 0.72 (0.507) 0.213 (0.720) -- (0.013) (0.733) 10.14 2.1% 4,938 0.90% 6.97% 105%
LIMITED MATURITY BOND SERIES (CLASS B)
1995(c)(d)
(e)(g) $10.00 $0.53 $0.664 $1.194 $(0.524) $-- $-- $(0.524) $10.67 12.2% $752 1.71% 5.12% 4%
1996(c)
(d)(g) 10.67 0.63 (0.524) 0.106 (0.624) -- (0.012) (0.636) $10.14 1.1% 761 1.88% 5.99% 105%
GLOBAL AGGRESSIVE BOND SERIES (CLASS A)
1995(c)(d)
(f) $10.00 $0.63 $0.09 $0.72 $(0.55) $(0.02) $-- $(0.57) $10.15 7.3% $2,968 2.00% 11.04% 127%
1996(c)(d)10.15 1.06 0.064 1.124 (0.687) (0.227) -- (0.914) 10.36 11.6% 3,507 1.98% 10.39% 96%
GLOBAL AGGRESSIVE BOND SERIES (CLASS B)
1995(c)
(d)(f) $10.00 $0.56 $0.12 $0.68 $(0.49) $(0.02) $-- $(0.51) $10.17 6.9% $1,440 2.75% 10.24% 127%
1996(c)(d)10.17 0.98 0.06 1.04 (0.573) (0.227) -- (0.80) 10.41 10.7% 1,541 2.75% 9.64% 96%
HIGH YIELD BOND SERIES (CLASS A)
1996(c)(d)
(h)(g) $15.00 $0.45 $0.32 $0.77 $(0.45) $-- $-- $(0.45) $15.32 5.2% $2,780 1.54% 7.47% 168%
HIGH YIELD BOND SERIES (CLASS B)
1996(c)(d)
(h)(g) $15.00 $0.41 $0.32 $0.73 $(0.41) $-- $-- $(0.41) $15.32 4.9% $2,719 2.26% 6.74% 168%
</TABLE>
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
22
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
SELECTED DATA FOR EACH SHARE OF CAPITAL
STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Ratio
of Ratio
Net Divi- expen- of
Net gain Total dends Net Net ses net
Fiscal asset (loss) from (from Distri asset assets to income Port-
period value Net (real- invest- net butions value end of aver- to folio
ended begin- invest- ized & ment invest- (from Return Total end Total period age average turn-
Decem- ning of ment unreal- opera- ment capital of distri- of return (thou- net net over
ber 31 period income ized) tions income) gains) capital butions period (a) sands) assets assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITY TAX-EXEMPT FUND (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $9.97 $0.61 $0.092 $0.702 $(0.612) $-- $-- $(0.612) $10.06 7.3% 28,608 0.84% 6.07% 91%
1993 10.06 0.51 0.702 1.212 (0.514) (0.388) -- (0.902) 10.37 11.6% 32,115 0.82% 4.92% 118%
1994 10.37 0.47 (1.317) (0.847) (0.473) -- -- (0.473) 9.05 (8.3%) 24,092 0.82% 4.74% 88%
1995 9.05 0.48 0.891 1.371 (0.481) -- -- (0.481) 9.94 15.5% 25,026 0.86% 5.02% 103%
(c)(d)(g)
1996 9.94 0.45 (0.215) 0.235 (0.455) -- -- (0.455) 9.72 2.5% 23,304 0.78% 4.67% 54%
(c)(d)(g)
SECURITY TAX-EXEMPT FUND (CLASS B)
1993(b) $10.88 $0.10 $(0.128) $(0.028) $(0.094) $(0.388) $-- $(0.482) $10.37 (0.2%) $106 2.89% 2.71% 90%
1994(c) 10.37 0.35 (1.321) (0.971) (0.349) -- -- (0.349) 9.05 (9.5%) 760 2.00% 3.50% 88%
1995 9.05 0.37 0.902 1.272 (0.372) -- -- (0.372) 9.95 14.3% 1,190 2.00% 3.90% 103%
(c)(d)(g)
1996 9.95 0.33 (0.215) 0.115 (0.335) -- -- (0.335) 9.73 1.2% 1,510 2.01% 3.44% 54%
(c)(d)(g)
SECURITY CASH FUND
1991 $1.00 $0.051 $-- $0.051 $(0.051) $-- $-- $(0.051) 1.00 5.2% $48,843 0.96% 5.21% --
1992(c) 1.00 0.028 -- 0.028 (0.028) -- -- (0.028) 1.00 2.8% 56,694 1.00% 2.75% --
1993(c) 1.00 0.023 -- 0.023 (0.023) -- -- (0.023) 1.00 2.4% 71,870 1.00% 2.28% --
1994 1.00 0.033 -- 0.033 (0.033) -- -- (0.033) 1.00 3.4% 58,102 0.96% 3.24% --
1995 1.00 0.049 -- 0.049 (0.049) -- -- (0.049) 1.00 5.0% 38,158 1.00% 5.00% --
(c)(d)(g)
1996 1.00 0.045 -- 0.045 (0.045) -- -- (0.045) 1.00 4.6% 45,331 1.01% 4.47% --
(c)(d)(g)
</TABLE>
(a) Total return information does not take into account any charges paid at
time of purchase or contingent deferred sales charges paid at time of
redemption.
(b) Class "B" shares were initially issued on October 19, 1993. Percentage
amounts for the period, except total return, have been annualized.
(c) Fund expenses were reduced by the Investment Manager and expense ratios
absent such reimbursement would have been as follows:
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- -----
Corporate Bond Class B -- -- -- 2.00% 2.19% 2.05%
U.S. Government Class A 1.24% 1.20% 1.20% 1.20% 1.22% 1.17%
Class B -- -- 1.75% 2.91% 3.70% 3.26%
Limited Maturity Class A -- -- -- -- 1.04% 1.40%
Bond Class B -- -- -- -- 2.12% 2.60%
Global Aggressive Class A -- -- -- -- 2.42% 2.73%
Bond Class B -- -- -- -- 3.93% 3.75%
High Yield Class A -- -- -- -- -- 2.11%
Class B -- -- -- -- -- 2.83%
Tax-Exempt Class A -- -- -- -- 0.86% 0.78%
Class B -- -- -- 2.32% 2.45% 2.19%
Cash -- 1.03% 1.03% -- 1.04% 1.01%
(d) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(e) Security Limited Maturity Bond Series was initially capitalized on January
17, 1995, with a net asset value of $10 per share. Percentage amounts for
period have been annualized, except for total return.
(f) Security Global Aggressive Bond Series was initially capitalized on June 1,
1995, with a net asset value of $10 per share. Percentage amounts for
period have been annualized, except for total return.
(g) Expense ratios including reimbursements, were calculated without the
reduction for custodian fees earnings credits beginning February 1, 1995.
Expense ratios with such reductions would have been as follows:
1995 1996
----- -----
Corporate Bond Class A 1.02% 1.01%
Class B 1.85% 1.85%
U.S. Government Class A 1.10% 0.64%
Class B 1.85% 1.85%
Limited Maturity Bond Class A 0.81% 0.87%
Class B 1.65% 1.85%
Tax-Exempt Class A 0.85% 0.77%
Class B 2.00% 2.00%
Cash Fund 1.00% 1.00%
(h) Security High Yield Bond Series was initially capitalized on August 5,
1996, with a net asset value of $15 per share. Percentage amounts for the
period have been annualized, except for total return.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Security Income Fund, Security Tax-Exempt Fund and Security Cash Fund (the
Funds) are registered under the Investment Company Act of 1940, as amended, as
diversified, open-end management investment companies. The shares of Security
Income Fund are currently issued in five Series, the Corporate Bond Series, the
U.S. Government Series, the Limited Maturity Bond Series, the Global Aggressive
Bond Series and the High Yield Bond Series, with each Series, in effect,
representing a separate fund. The Income Fund is required to account for each
Series separately and to allocate general expenses to each Series based upon the
net asset value of each Series. The following is a summary of the significant
accounting policies followed by the Funds in the preparation of their financial
statements. These policies are in conformity with generally accepted accounting
principles.
A. SECURITY VALUATION -- Valuations of Income Fund's and Tax-Exempt Fund's
securities are supplied by pricing services approved by the Board of Directors.
Securities listed or traded on a national securities exchange are valued on the
basis of the last sales price. If there are no sales on a particular day, then
the securities are valued at the last bid price. Securities for which market
quotations are not readily available are valued by a pricing service considering
securities with similar yields, quality, type of issue, coupon, duration and
rating. If there is no bid price or if the bid price is deemed to be
unsatisfactory by the Board of Directors or by the Fund's investment manager,
then the securities are valued in good faith by such method as the Board of
Directors determines will reflect the fair value. The Funds' officers, under the
general supervision of the Board of Directors, regularly review procedures used
by, and valuations provided by, the pricing service.
Cash Fund, by approval of the Board of Directors, utilizes the amortized
cost method for valuing portfolio securities, whereby all investments are valued
by reference to their acquisition cost as adjusted for amortization of premium
or accretion of discount.
Generally, trading in foreign securities markets is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of foreign securities are determined as of the close of such foreign
markets or the close of the New York Stock Exchange if earlier. All investments
quoted in foreign currency are valued in U.S. dollars on the basis of the
foreign currency exchange rate prevailing at the close of business. The Global
Aggressive Bond Series' investments in foreign securities may involve risks not
present in domestic investments. Since foreign securities may be denominated in
a foreign currency and involve settlement and pay interest in foreign
currencies, changes in the relationship of these foreign currencies to the U.S.
dollar can significantly affect the value of the investments and earnings of the
Funds. Foreign investments may also subject the Global Aggressive Bond Series to
foreign government exchange restrictions, expropriation, taxation or other
political, social or economic developments, all of which could affect the market
and/or credit risk of the investments.
B. FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Funds are
maintained in U. S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
The Funds isolate that portion of results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in the market prices of securities held.
Net realized foreign exchange gains or losses arise from sales of portfolio
securities, sales of foreign currencies, and the difference between asset and
liability amounts initially stated in foreign currencies and the U.S. dollar
value of the amounts actually received or paid. Net unrealized foreign exchange
gains or losses arise from changes in the value of portfolio securities and
other assets and liabilities at the end of the reporting period, resulting from
changes in the exchange rates.
C. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - Global Aggressive Bond
Series may enter into forward foreign exchange contracts in connection with
foreign currency risk from purchase or sale of securities denominated in foreign
currency. The Series may also enter into such contracts to manage changes in
foreign currency exchange rates on portfolio positions. These contracts are
marked to market daily, by recognizing the difference between the contract
exchange rate and the current market rate as unrealized gains or losses.
Realized gains or losses are recognized when contracts are settled and are
reflected in the statement of operations. These contracts involve market risk in
excess of the amount reflected in the Balance Sheet. The face or contract amount
in U.S. dollars reflects the total exposure the Global Aggressive Bond Series
has in that particular currency contract. Losses may arise due to changes in the
value of the foreign currency or if the counterparty does not perform under the
contract.
D. OPTIONS - The Global Aggressive Bond Series and High Yield Bond Series
may purchase put and call options and write such options on a covered basis on
securities that are traded on recognized securities exchanges and
over-the-counter markets. Call and put options on securities give the holder the
right to purchase or sell, respectively (and the writer the obligation to sell
or purchase), a security at a specified price, on or until a certain date. The
primary risks associate with the use of options are an imperfect correlation
between the change in market value of the securities held by the Series and the
price of the option, the possibility of an illiquid market, and the inability of
the counter-party to meet the terms of the contract.
The premium received for a written option is recorded as an asset, with an
equal liability which is marked to market based on the option's quoted daily
settlement price. Fluctuation in the value of such instruments are recorded as
unrealized appreciation (depreciation) until terminated, at which time realized
gains and losses are recognized. The Global Aggressive Bond Series wrote covered
call options during the year in which the Series received $7,179 in premiums.
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses are reported on an identified cost basis. Interest income is
recognized on the accrual basis. Premium and discounts (except original issue
discounts) on debt securities are not amortized, except Security Tax-Exempt Fund
which amortizes premiums.
F. DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions made during the
year from net investment income or net realized gains may differ from their
ultimate characterization for federal income tax purposes. These differences are
primarily due to the recharacterization of foreign currency gains and losses.
G. TAXES - The Funds complied with the requirements of the Internal Revenue
Code applicable to regulated investment companies and distributed all of their
taxable net income and net realized gains sufficient to relieve them from all,
or substantially all, federal income, excise and state income taxes. Therefore,
no provision for federal or state income tax is required.
H. EARNINGS CREDITS - Under the fee schedule with the custodian, the Funds
earn credits based on overnight custody cash balances. These credits are
utilized to reduce related custodial expenses. The custodian fees disclosed in
the statement of operations do not reflect the reduction in expense from the
related earnings credits.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees are payable to Security Management Company, LLC (SMC) under
investment advisory contracts at an annual rate of .50 of 1% of the average net
assets of each fund, except for Global Aggressive Bond Series and the High Yield
Bond Series whose fees are .75 of 1% and .60 of 1% of the average net assets of
each Series, respectively. The investment advisory contract for Income Fund
provides that the total annual expenses
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
of each Series of the Fund (including management fees and custodian fees net of
earnings credits, but excluding interest, taxes, brokerage commissions and
extraordinary expenses) will not exceed the level of expenses which Income Fund
is permitted to bear under the most restrictive expense limitation imposed by
any state in which shares of the Fund are then qualified for sale. For the
period ended December 31, 1996, SMC agreed to limit the total expenses of
Corporate Bond Series, U.S. Government Series and Limited Maturity Bond Series
to an annual rate of 1.1% of the average daily net asset value of Class A shares
and 1.85% of Class B shares of each respective Series. SMC also agreed to limit
the total expenses of the Global Aggressive Bond Series and the High Yield Bond
Series to 2.0% for Class A Shares and 2.75% for Class B shares. In addition, SMC
agreed to waive all of the management fees for the U.S. Government Series,
Limited Maturity Bond Series, Global Aggressive Bond Series and the High Yield
Bond Series until December 31, 1996. The investment advisory contract for
Tax-Exempt and Cash Funds provides that the total annual expenses of the Funds
net of custodian fee earnings credits will not exceed an amount equal to an
annual rate of 1.0% of the average net assets of Class A shares and 2.0% of
Class B shares of the Tax-Exempt Fund as calculated on a daily basis.
The Funds have entered into contracts with SMC for transfer agent services
and certain other administrative services which SMC provides to the Funds. SMC
is paid an annual fixed charge per account and shareholder and dividend
transaction fees.
As the administrative agent for the Funds, SMC performs administrative
functions, such as regulatory filings, bookkeeping, accounting and pricing
functions for the Funds. For this service SMC receives on an annual basis, a fee
of .09 percent of the average daily net assets of Corporate Bond Series, U.S.
Government Series, Limited Maturity Bond Series, High Yield Bond Series, and
Tax-Exempt Fund and .045 percent of the average daily net assets of Cash Fund
and Global Aggressive Bond Series, calculated daily and payable monthly. For the
identified administrative services SMC also receives, with respect to the Global
Aggressive Bond Series, an annual fee equal to the greater of .10 percent of its
average net assets or (i) $45,000 in the year ending April 29, 1997; and (ii)
$60,000 thereafter.
SMC pays the Sub-Advisor, Lexington Management Corporation (LMC) an annual
fee in an amount equal to .35% of the average net assets of Global Aggressive
Bond Series, for investment advisory and certain administrative services
provided to the Global Aggressive Bond Series. LMC agreed to waive its
sub-advisory fee until December 31, 1996. The Sub-Advisor has entered into a
sub-advisory contract with MFR Advisors, Inc., ("MFR"), under which MFR will
provide the Global Aggressive Bond Series with investment and economic research
services. For the service provided by MFR, MFR receives from the Sub-Advisor, a
fee equal to .15% of the average daily net assets of the Global Aggressive Bond
Series.
Income and Tax-Exempt Funds have adopted Distribution Plans related to the
offering of Class B shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940. The Plans provide for payments at an annual rate of 1.0% of the
average net assets of Class B shares. Class A shares of Income Fund incur 12b-1
distribution fees at an annual rate of .25% of the average net assets of each
Series.
Security Distributors, Inc. (SDI), a wholly-owned subsidiary of Security
Benefit Group, Inc., a financial services holding company, is national
distributor for Income a nd Tax-Exempt Funds. SDI received net underwriting
commissions on sales of Class A shares and contingent deferred sales charges on
redemptions occurring within 5 years of the date of purchase of Class B shares,
after allowances to brokers and dealers for the period ended December 31, 1996,
in the amounts presented below:
NET UNDERWRITING BROKER/DEALER
COMMISSION ALLOWANCES
-----------------------------------------------------------------
Corporate Bond Series $23,873 $54,353
U.S. Government Series 10,849 21,835
Limited Maturity
Bond Series (377) 7,971
Global Aggressive
Bond Series 4,824 3,686
High Yield Series 283 5,491
Tax-Exempt Fund 13,059 42,066
Certain officers and directors of the Funds are also officers and/or
directors of Security Benefit Life Insurance Company and its subsidiaries, which
include SMC and SDI.
3. INVESTMENT TRANSACTIONS
Investment transactions for the period ended December 31, 1996, (excluding
overnight investments and short-term debt securities) were as follows:
PURCHASES PROCEEDS FROM SALES
-------------------------------------------------------------------
Corporate Bond Series $247,769,817 $261,981,460
U.S. Government Series 7,252,295 8,350,616
Limited Maturity
Bond Series 6,582,167 5,034,918
Global Aggressive
Bond Series 3,601,246 3,337,996
High Yield Series 8,153,564 3,220,588
Tax-Exempt Fund 13,361,690 14,342,980
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) as of December 31,
1996, were as follows:
AGGREGATE GROSS AGGREGATE GROSS NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
APPRECIATION DEPRECIATION (DEPRECIATION)
- -------------------------------------------------------------------------------
Corporate Bond Series $1,185,689 ($1,388,839) ($203,150)
U.S. Government Series 184,874 (23,285) 161,589
Limited Maturity
Bond Series 115,348 (51,798) 63,550
Global Aggressive
Bond Series 240,819 (96,331) 144,488
High Yield Series 147,567 (500) 147,067
Tax-Exempt Fund 544,263 (92,410) 451,853
At December 31, 1996, the following Funds had accumulated net realized
capital loss carryovers as shown:
CAPITAL LOSS EXPIRATION
CARRYOVER YEAR
Corporate Bond Series $11,009,916 2002
1,347,012 2004
U.S. Government Series 978,377 2002
Limited Maturity Bond Series 23,055 2003
46,509 2004
Global Aggressive Bond Series 48,004 2004
High Yield Series 36,585 2004
Tax-Exempt Fund 1,477,887 2002
5. FORWARD FOREIGN EXCHANGE CONTACTS
At December 31, 1996, Global Aggressive Bond Series had the following open
forward foreign exchange contracts to sell currency (excluding foreign currency
contracts used for purchase and sale settlements):
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
SETTLEMENT CONTRACT CONTRACT CURRENT UNREALIZED
CURRENCY DATE AMOUNT RATE RATE GAIN
Canadian
Dollar 1/31/97 $224,215 1.3380 1.368 $4,917
6. TAX STATUS OF DIVIDENDS
Except for tax-exempt dividends, the income dividends paid by the Funds are
taxable as ordinary income on the shareholders' tax returns. None of the amount
taxable as ordinary income for the Funds qualifies for the dividends received
deduction available to corporate shareholders in accordance with the provisions
of the Internal Revenue Code.
None of the exempt-interest dividends paid by Security Tax-Exempt Fund have
been determined to be attributable to interest from specified private activity
bonds. Thus, no portion is required to be reported as a tax preference item on
Form 4626 or 6251, as appropriate.
In some states, the portion of ordinary income dividends attributable to
the Funds' investment in direct obligations of the U.S. Government may not be
subject to state taxation. For the year ended December 31, 1996, interest on
U.S. Government obligations as a percentage of gross investment income was: Cash
Fund, 5%; Corporate Bond Series, 6%; U.S. Government Series, 28%; Limited
Maturity Bond Series, 6%; and Global Aggressive Bond Series, 1%. Since the
qualifications for such exemption vary state by state, we suggest you consult
your tax advisor for applicability.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
SECURITY INCOME FUND, SECURITY TAX-EXEMPT FUND
AND SECURITY CASH FUND
We have audited the accompanying balance sheets, including the statements
of net assets of Security Income Fund (comprising, respectively, the Corporate
Bond, U.S. Government, Limited Maturity Bond, Global Aggressive Bond and High
Yield Bond Series), Security Tax-Exempt Fund and Security Cash Fund (the Funds)
as of December 31, 1996, the related statements of operations, changes in net
assets and the financial highlights for the periods indicated therein. These
financial statements and the financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
investments owned as of December 31, 1996, by correspondence with the custodian.
As to securities relating to uncompleted transactions, we performed other audit
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the Funds (including each of the Series of Security Income Fund) at
December 31, 1996, and the results of their operations, changes in their net
assets and the financial highlights for the periods indicated therein in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Kansas City, Missouri
January 31, 1997
26
<PAGE>
THE SECURITY GROUP
OF MUTUAL FUNDS
- -------------------
Security Growth and Income Fund
Security Equity Fund
- Equity Series
- Equity Global Series
- Asset Allocation Series
- Social Awareness Series
Security Ultra Fund
Security Income Fund
- Corporate Bond Series
- U.S. Government Series
- Limited Maturity Bond Series
- Global Aggressive Bond Series
- High Yield Bond Series
Security Tax-Exempt Fund
Security Cash Fund
This report is submitted for the general information of the shareholders of the
Funds. The report is not authorized for distribution to prospective investors in
the Funds unless preceded or accompanied by an effective prospectus which
contains details concerning the sales charges and other pertinent information.
SECURITY FUNDS
OFFICERS AND DIRECTORS
DIRECTORS
Willis A. Anton
Donald A. Chubb, Jr.
John D. Cleland
Jack H. Hamilton
Donald L. Hardesty
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Jeffrey B. Pantages
Hugh L. Thompson, Ph.D.
OFFICERS
John D. Cleland, President
James R. Schmank, Vice President and Treasurer
Jane A. Tedder, Vice President
Mark E. Young, Vice President
Steven M. Bowser, Assistant Vice President
Barbara J. Davison, Assistant Vice President
Greg A. Hamilton, Assistant Vice President
Amy J. Lee, Secretary
Brenda M. Harwood, Assistant Treasurer and Assistant Secretary
Christopher D. Swickard, Assistant Secretary
[SDI LOGO]
<PAGE>
SECURITY INCOME FUND
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements
Included in Part A of this Registration Statement: Per Share
Income and Capital Changes To be included in Part B of this
Registration Statement:
The audited financial statements contained in the most
recent Annual Report of Security Income Fund for fiscal
year end December 31, 1996, are incorporated by
reference in Part B of this Registration Statement.
b. Exhibits:
(1) Articles of Incorporation.
(2) Corporate Bylaws of Registrant.(a)
(3) Not applicable.
(4) Specimen copy of share certificate for Registrant's
shares of capital stock.
(5) (a) Investment Advisory Contract - SMC, LLC.(e)
(b) Investment Advisory Contract - MFR.
(c) Sub-Advisory Agreement - Lexington.
(d) Sub-Advisory Agreement - SMC, LLC.
(6) (a) Distribution Agreement.
(b) Class B Distribution Agreement.
(7) Form of Non-Qualified Deferred Compensation Plan.
(8) (a) Custodian Agreement - UMB.
(b) 1995 Custodian Agreement - Chase(b)
(c) 1997 Custodian Agreement - Chase.
(9) (a) 1987 Administrative Services and Transfer Agency
Agreement.(e)
(b) Sub-Administrative Agreement - Lexington.(b)
(c) 1997 Administrative Services and Transfer
Agency Agreement.
(10) Opinion of counsel as to the legality of the
securities offered.(c)
(11) Consent of Independent Auditors.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) (a) Distribution Plan.(a)
(b) Class B Distribution Plan.(a)
(16) Schedule of Computation of Performance.
(17) Financial Data Schedules.
(18) Multiple Class Plan.(d)
(a) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 50 to Registration Statement No.
2-38414 (May 1, 1995).
(b) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 52 to Registration Statement No.
2-38414 (November 1, 1995).
(c) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 48 to Registration Statement No.
2-38414 (January 17, 1995).
(d) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 53 to Registration Statement No.
2-38414 (April 29, 1996).
(e) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 56 to Registration Statement No.
2-38414 (February 5, 1997).
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES AS OF JANUARY 31, 1997.
(1) (2)
NUMBER OF RECORD
TITLE OF CLASS SHAREHOLDERS
Corporate Bond - Shares of Common Stock, Class A 4,770
Corporate Bond - Shares of Common Stock, Class B 835
U.S. Government - Shares of Common Stock, Class A 881
U.S. Government - Shares of Common Stock, Class B 146
Limited Maturity Bond - Shares of Common Stock, Class A 224
Limited Maturity Bond - Shares of Common Stock, Class B 23
High Yield - Shares of Common Stock, Class A 34
High Yield - Shares of Common Stock, Class B 14
Global High Yield (formerly Global Aggressive Bond) -
Shares of Common Stock, Class A 100
Global High Yield (formerly Global Aggressive Bond) -
Shares of Common Stock, Class B 20
ITEM 27. INDEMNIFICATION.
A policy of insurance covering Security Management Company, LLC,
its affiliate Security Distributors, Inc., and all of the
registered investment companies advised by Security Management
Company, LLC insures the Registrant's directors and officers
against liability arising by reason of an alleged breach of duty
caused by any negligent act, error or accidental omission in the
scope of their duties.
Paragraph 30 of the Registrant's Bylaws, as amended February 3,
1995, provides in relevant part as follows:
30. INDEMNIFICATION AND LIABILITY OF DIRECTORS AND OFFICERS.
Each person who is or was a Director or officer of the
Corporation or is or was serving at the request of the
Corporation as a Director or officer of another corporation
(including the heirs, executors, administrators and estate of
such person) shall be indemnified by the Corporation as of
right to the full extent permitted or authorized by the laws
of the State of Kansas, as now in effect and is hereafter
amended, against any liability, judgment, fine, amount paid
in settlement, cost and expense (including attorney's fees)
asserted or threatened against and incurred by such person in
his/her capacity as or arising out of his/her status as a
Director or officer of the Corporation or, if serving at the
request of the Corporation, as a Director or officer of
another corporation. The indemnification provided by this
bylaw provision shall not be exclusive of any other rights to
which those indemnified may be entitled under the Articles of
Incorporation, under any other bylaw or under any agreement,
vote of stockholders or disinterested directors or otherwise,
<PAGE>
and shall not limit in any way any right which the
Corporation may have to make different or further
indemnification with respect to the same or different persons
or classes of persons.
No person shall be liable to the Corporation for any loss,
damage, liability or expense suffered by it on account of any
action taken or omitted to be taken by him/her as a Director
or officer of the Corporation or of any other corporation
which he/she serves as a Director or officer at the request
of the Corporation, if such person (a) exercised the same
degree of care and skill as a prudent man would have
exercised under the circumstances in the conduct of his/her
own affairs, or (b) took or omitted to take such action in
reliance upon advice of counsel for the Corporation, or for
such other corporation, or upon statement made or information
furnished by Directors, officers, employees or agents of the
Corporation, or of such other corporation, which he/she had
no reasonable grounds to disbelieve.
In the event any provision of this section 30 shall be in
violation of the Investment Company Act of 1940, as amended,
or of the rules and regulations promulgated thereunder, such
provisions shall be void to the extent of such violations.
On March 25, 1988, the shareholders approved the Board of
Directors' recommendation that the Articles of Incorporation be
amended by adopting the following Article Fifteenth:
"A director shall not be personally liable to the corporation
or to its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that this sentence
shall not eliminate nor limit the liability of a director:
A. for any breach of his or her duty of loyalty to the
corporation or to its stockholders;
B. for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation
of law;
C. for any unlawful dividend, stock purchase or
redemption under the provisions of Kansas Statutes
Annotated (K.S.A.) 17-6424 and amendments thereto; or
D. for any transaction from which the director derived
an improper personal benefit."
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been
<PAGE>
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
ITEM 28. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER
Security Management Company, LLC, investment manager to Corporate
Bond, Limited Maturity Bond, U.S. Government and High Yield Series
of Security Income Fund, also acts as investment manager to
Security Equity Fund, Security Ultra Fund, Security Growth and
Income Fund, Security Cash Fund, SBL Fund, and Security Tax-Exempt
Fund and acts as sub-investment adviser to the Emerging Markets
Total Return, Global Asset Allocation and Global High Yield
(formerly Global Aggressive Bond) Series of Security Income Fund.
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
--------------------- -------------------------------------------------------
James R. Schmank President (Interim), Treasurer, Chief Fiscal Officer
and Managing Member Representative
Security Management Company, LLC
Vice President and Director
Security Distributors, Inc.
Vice President and Interim Chief Investment Officer
Security Benefit Group, Inc.
Security Benefit Life Insurance Company
Vice President and Treasurer
Security Growth and Income Fund,
Security Income Fund, Security Cash Fund,
Security Tax-Exempt Fund, Security Ultra Fund,
Security Equity Fund, SBL Fund
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
--------------------- -------------------------------------------------------
Jeffrey B. Pantages President, Chief Investment Officer and Director
Security Management Company (until June 1996)
Director
Security Cash Fund, Security Income Fund,
Security Tax-Exempt Fund, SBL Fund,
Security Growth and Income Fund,
Security Equity Fund, Security Ultra Fund
Senior Vice President and Chief Investment Officer
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
Director
Mulvane Art Center
Mulvane Art Museum
Washburn University
17th & Jewell
Topeka, Kansas
United Way of Greater Topeka
P.O. Box 4188
Topeka, Kansas
John D. Cleland Senior Vice President and Managing Member
Representative
Security Management Company, LLC
President and Director
Security Cash Fund, Security Income Fund,
Security Tax-Exempt Fund, SBL Fund,
Security Growth and Income Fund,
Security Equity Fund, Security Ultra Fund
Senior Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Vice President and Director
Security Distributors, Inc.
Trustee and Treasurer
Mount Hope Cemetery Corporation
4700 SW 17th
Topeka, Kansas
Trustee and Investment Committee Chairman
Topeka Community Foundation
5100 SW 10th
Topeka, Kansas
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
--------------------- -------------------------------------------------------
James W. Lammers Senior Vice President and Director
Security Management Company, LLC
Security Distributors, Inc.
Director (until November 1996)
Security Management Company
Donald E. Caum Director (until November 1996)
Security Management Company
Senior Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Director
YMCA Metro, Topeka, Kansas
Executive Director
Jayhawk Area Council Boy Scouts of America,
Topeka, Kansas
Metropolitan Ballet, Topeka, Kansas
James L. Woods Senior Vice President
Security Management Company, LLC
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Mark E. Young Vice President
Security Growth and Income Fund,
Security Income Fund, Security Cash Fund,
Security Tax-Exempt Fund, Security Ultra Fund,
Security Equity Fund, SBL Fund,
Security Management Company, LLC,
Security Distributors, Inc.
Assistant Vice President
Security Benefit Life Insurance Company
First Security Benefit Life Insurance and
Annuity Company of New York
Security Benefit Group, Inc.
Trustee
Topeka Zoological Foundation, Topeka, Kansas
Terry A. Milberger Senior Portfolio Manager and Vice President
Security Management Company, LLC
Vice President
Security Equity Fund, SBL Fund
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
--------------------- -------------------------------------------------------
Jane A. Tedder Vice President and Senior Portfolio Manager
Security Management Company, LLC
Vice President
Security Income Fund, SBL Fund,
Security Equity Fund
Gregory A. Hamilton Second Vice President
Security Management Company, LLC
Assistant Vice President
Security Income Fund, SBL Fund,
Security Equity Fund,
Security Tax-Exempt Fund
Director
Downtown Topeka, Inc., Topeka, Kansas
Trustee
Kansas State University Foundation,
Manhattan, Kansas
Amy J. Lee Vice President and Associate General Counsel
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
Secretary
Security Management Company, LLC,
Security Distributors, Inc., Security Cash Fund,
Security Equity Fund, Security Tax-Exempt Fund,
Security Ultra Fund, SBL Fund,
Security Growth and Income Fund,
Security Income Fund
Brenda M. Harwood Assistant Vice President,
Assistant Treasurer and Assistant Secretary
Security Management Company, LLC
Assistant Treasurer and Assistant Secretary
Security Equity Fund, Security Ultra Fund,
Security Growth and Income Fund,
Security Income Fund,
Security Cash Fund, SBL Fund,
Security Tax-Exempt Fund
Treasurer
Security Distributors, Inc.
Steven M. Bowser Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
--------------------- -------------------------------------------------------
Thomas A. Swank Second Vice President and Portfolio Manager
Security Management Company, LLC
Second Vice President
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
Barbara J. Davison Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
Vice-Chairman
Topeka Chapter American Red Cross
Topeka, Kansas
Cindy L. Shields Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Ultra Fund, SBL Fund
Larry L. Valencia Assistant Vice President and Senior Research Analyst
Security Management Company, LLC
James P. Schier Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Martha L. Sutherland Second Vice President
Security Management Company, LLC
Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
*Located at 700 Harrison, Topeka, Kansas 66636-0001
MFR ADVISORS, INC.:
MFR Advisors, Inc. acts as investment adviser to Emerging Markets Total
Return, Global Asset Allocation and Global High Yield (formerly Global
Aggressive Bond) Series of Security Income Fund. MFR Advisors, Inc. serves as
sub-adviser to one investment company other than Registrant.
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
--------------------- -------------------------------------------------------
Maria Fiorini Ramirez Chief Executive Officer, President and Director
MFR Advisors, Inc.
Director
Statewide Savings Bank S.L.A. of New Jersey
Arlington Capital-Offshore Investment Company
Dorchester Capital-Offshore Investment Company
Bruce Jensen Executive Vice President
MFR Advisors, Inc.
Timothy F. Downing Chief Financial Officer
MFR Advisors, Inc.
*Located at One Liberty Plaza, New York, New York 10006
LEXINGTON MANAGEMENT CORPORATION:
Lexington Management Corporation, sub-adviser to MFR Global High Yield Series
(formerly Global Aggressive Bond Series), MFR Emerging Markets Total Return
Series and MFR Global Asset Allocation Series, acts as investment adviser,
sub-adviser and/or sponsor to 21 investment companies other than Registrant.
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
--------------------- -------------------------------------------------------
Robert M. DeMichele President and Director
Lexington Global Asset Managers, Inc.
Chairman and Chief Executive Officer
Lexington Management Corporation,
Lexington Funds
Distributor, Inc.
Director
Chartwell Re Corporation,
The Navigator's Insurance Group, Inc.,
Unione Italiana Reinsurance,
Vanguard Cellular Systems, Inc.
Chairman of the Board
Lexington Group of Investment Companies,
Market Systems Research, Inc.,
Market Systems Research Advisors, Inc.
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
--------------------- -------------------------------------------------------
Richard M. Hisey Executive Vice President and Chief Financial Officer
Lexington Global Asset Managers, Inc.
Chief Financial Officer, Managing Director and Director
Lexington Management Corporation
Chief Financial Officer, Vice President and Director
Lexington Funds Distributor, Inc.
Vice President and Treasurer
Market Systems Research Advisors, Inc.
Chief Financial Officer and Vice President
Lexington Group of Investment Companies
Lawrence Kantor Executive Vice President and General Manager-
Mutual Funds
Lexington Global Asset Managers, Inc.
Executive Vice President, Managing Director
and Director
Lexington Management Corporation
Executive Vice President and Director
Lexington Funds Distributor, Inc.
Vice President and Director
Lexington Group of Investment Companies
Stuart S. Richardson Chairman of the Board
Lexington Global Asset Managers, Inc.
Director
Lexington Management Corporation
*Located at P.O. Box 1515, Saddle Brook, New Jersey 07663.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Security Equity Fund
Security Ultra Fund
Security Growth and Income Fund
Security Tax-Exempt Fund
Variflex Variable Annuity Account
Varilife Variable Annuity Account
Parkstone Variable Annuity Account
Security Varilife Separate Account
Variflex LS Variable Annuity Account
<PAGE>
(b)
(1) (2) (3)
NAME AND PRINCIPAL POSITION AND OFFICES POSITION AND OFFICES
BUSINESS ADDRESS* WITH UNDERWRITER WITH REGISTRANT
------------------ -------------------- --------------------
Richard K Ryan President and Director None
John D. Cleland Vice President and Director President and Director
James W. Lammers Senior Vice President None
and Director
Louis R. Jicha Vice President and Director None
James R. Schmank Vice President and Director Vice President and
Treasurer
Mark E. Young Vice President Vice President
Amy J. Lee Secretary Secretary
Brenda M. Harwood Treasurer Assistant Secretary
and Assistant
Treasurer
Daniel J. McNichol Vice President None
Clark A. Anderson Regional Vice President None
Robert L. Kirchner Regional Vice President None
Paul Richardson Regional Vice President None
Ronald V. Vermillion Regional Vice President None
Jennifer A. Zaat Regional Vice President None
Kent N. Spillman Regional Vice President None
Carla D. Griffin Regional Vice President None
Anthony Hammock Regional Vice President None
William G. Mancuso Regional Vice President None
Marek E. Lakotko Regional Vice President None
Eric M. Aanes Regional Vice President None
Susan L. Tully Regional Vice President None
*700 Harrison, Topeka, Kansas 66636-0001
(c) Not applicable.
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the rules
promulgated thereunder are maintained by Security Management
Company, LLC, 700 Harrison, Topeka, Kansas 66636-0001; MFR
Advisors, Inc., One Liberty Plaza, New York, New York 10006 and
Lexington Management Corporation, Park 80 West, Plaza Two, Saddle
Brook, New Jersey 07663. Records relating to the duties of the
Registrant's custodian are maintained by UMB Bank, n.a., 928 Grand
Avenue, Kansas City, Missouri 64106 and Chase Manhattan Bank, 1211
Avenue of the Americas, New York, New York 10036.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant hereby undertakes to furnish each person, to whom
a prospectus is delivered, a copy of the Registrant's latest
report to shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Topeka, and State of Kansas on the 23rd day of April,
1997.
SECURITY INCOME FUND
(The Registrant)
By: JOHN D. CLELAND
-------------------------------------
John D. Cleland, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated:
Date: April 23, 1997
-------------------------------------
Willis A. Anton, Jr. Director
- ------------------------------
Willis A. Anton, Jr.
Donald A. Chubb, Jr. Director
- ------------------------------
Donald A. Chubb, Jr.
John D. Cleland President and Director
- ------------------------------
John D. Cleland
Donald L. Hardesty Director
- ------------------------------
Donald L. Hardesty
Penny A. Lumpkin Director
- ------------------------------
Penny A. Lumpkin
Mark L. Morris, Jr. Director
- ------------------------------
Mark L. Morris, Jr.
Jeffrey B. Pantages Director
- ------------------------------
Jeffrey B. Pantages
Hugh L. Thompson Director
- ------------------------------
Hugh L. Thompson
<PAGE>
EXHIBIT INDEX
(1) Articles of Incorporation
(2) None
(3) None
(4) Specimen Copy of Share Certificates
(5) (a) None
(b) Investment Advisory Contract - MFR
(c) Sub-Advisory Agreement - Lexington
(d) Sub-Advisory Agreement - SMC, LLC
(6) (a) Distribution Agreement
(b) Class B Distribution Agreement
(7) Form of Non-Qualified Deferred Compensation Plan
(8) (a) Custodian Agreement - UMB
(b) None
(c) 1997 Custodian Agreement - Chase
(9) (a) None
(b) None
(c) 1997 Administrative Services and Transfer Agency Agreement
(10) None
(11) Consent of Independent Auditors
(12) None
(13) None
(14) None
(15) (a) None
(b) None
(16) Schedule of Computation of Performance
(17) Financial Data Schedules
(18) None
<PAGE>
ARTICLES OF INCORPORATION
OF
SECURITY BOND FUND, INC.
We, the undersigned incorporators, hereby associate ourselves together
to form and establish a corporation for profit under the laws of the State of
Kansas.
FIRST: The name of the corporation is:
SECURITY BOND FUND, INC.
SECOND: The location of its registered office in Kansas is Security
Benefit Life Building, 700 Harrison Street, Topeka, Kansas 66603.
THIRD: The name and address of its registered agent in Kansas is Will
J. Miller, Jr., Security Benefit Life Building, 700 Harrison Street, Topeka,
Kansas 66603.
FOURTH: This corporation is organized for profit and the nature of its
business, objects and purposes to be transacted, promoted and carried on, is:
(1) To engage in the business of an investment company and mutual fund
and to hold, invest and reinvest its funds, and in connection therewith to
hold part or all of its funds in cash, and to purchase or otherwise
acquire, hold for investment or otherwise, trade, purchase on margin, sell,
sell short, assign, pledge, hypothecate, negotiate, transfer, exchange or
otherwise dispose of or turn to account or realize upon, securities (which
term "securities" shall for the purposes of this Article, without
limitation of the generality thereof, be deemed to include any stocks,
bonds, shares, debentures, notes, mortgages or other obligations, and any
certificates, receipts, warrants or other instruments representing rights
to receive, purchase or subscribe for the same, or evidencing or
representing any other rights or interests therein, or in any property or
assets) created or issued by any persons, firms, associations,
corporations, syndicates, combinations, organizations, governments or
subdivisions thereof; and to exercise, as owner or holder of any
securities, all rights, powers and privileges in respect thereof; and to do
any and all acts and things for the preservation, protection, improvement
and enhancement in value of any and all such securities.
(2) To issue and sell shares of its own capital stock in such amounts
and on such terms and conditions, for such purposes and for such amount or
kind of consideration (including, without limitation thereof, securities)
now or hereafter permitted by the laws of Kansas, by these Articles of
Incorporation and the Bylaws of the corporation, as its Board of Directors
may determine.
(3) To purchase or otherwise acquire, redeem, hold, dispose of,
resell, transfer, or reissue (all without any vote or consent of
stockholders of the corporation) shares of its capital stock, in any manner
and to the extent now or hereafter permitted by the laws of the State of
Kansas, by these Articles of Incorporation and by the Bylaws of the
corporation, provided that shares of its own capital stock belonging to it
shall not be voted directly or indirectly.
<PAGE>
(4) To conduct its business in all its branches at one or more offices
in Kansas and elsewhere in any part of the world, without restriction or
limit as to extent.
(5) To carry out all or any of the foregoing purposes as principal or
agent, and alone or with associates or, to the extent now or hereafter
permitted by the laws of Kansas, as a member of, or as the owner or holder
of any stock of, or shares of interest in, any firm, association,
corporation, trust or syndicate; and in connection therewith to make or
enter into such deeds or contracts with any persons, firms, associations,
corporations, syndicates, governments or sub-divisions thereof, and to do
such acts and things and to exercise such powers as a natural person could
lawfully make, enter into, do or exercise.
(6) To do any and all such further acts and things and to exercise any
and all such further powers as may be necessary, incidental, relative,
conducive, appropriate or desirable for the accomplishment, carrying out or
attainment of all or any of the foregoing purposes.
It is the intention that each of the purposes, specified in each of
the paragraphs of this Article FOURTH, shall be in no wise limited or restricted
by reference to or inference from the terms of any other paragraph, but that the
purposes specified in each of the paragraphs of this Article FOURTH shall be
regarded as independent objects, purposes and powers. The enumeration of the
specific purposes of this Article FOURTH shall not be construed to restrict in
any manner the general objects, purposes and powers of this corporation, nor
shall the expression of one thing be deemed to exclude another, although it be
of like nature. The enumeration of purposes herein shall not be deemed to
exclude or in any way limit by inference any objects, purposes or powers which
this corporation has power to exercise, whether expressly or by force of the
laws of the State of Kansas, now or hereafter in effect, or impliedly by any
reasonable construction of such laws.
FIFTH: The total number of shares which the corporation shall have
authority to issue shall be 3,000,000 shares of capital stock, each of the par
value of $1.00. The Board of Directors shall have the power to fix the
consideration to be received by the corporation for any and all shares of stock
issued by the corporation, but at not less than the par value thereof.
The following provisions are hereby adopted for the purpose of setting
forth the powers, rights, qualifications, limitations or restrictions of the
capital stock of the corporation:
(1) At all meetings of stockholders each stockholder of the
corporation shall be entitled to one vote in person or by proxy on each
matter submitted to a vote at such meeting for each share of capital stock
standing in this name on the books of the corporation on the date, fixed in
accordance with the Bylaws, for determination of stockholders entitled to
vote at such meeting. At all elections of directors each stockholder shall
be entitled to as many votes as shall equal the number of shares of stock
multiplied by the number of directors to be elected, and he may cast all of
such votes for a single director or may distribute them among the number to
be voted for, on any two or more of them as he may see fit.
(2) No holder of any shares of stock of the corporation shall be
entitled as such, as a matter of right, to purchase or subscribe for any
shares of stock of the corporation of any class, whether now or hereafter
authorized or whether issued for cash, property or services or as a
dividend or otherwise, or to purchase or subscribe for any obligations,
bonds, notes, debentures, other securities or stock convertible into shares
of stock of the corporation or carrying or evidencing any right to purchase
shares of stock of any class.
<PAGE>
(3) All persons who shall acquire stock in the corporation shall
acquire the same subject to the provisions of these Articles of
Incorporation.
SIXTH: The minimum amount of capital with which the corporation will
commence business is One Thousand Dollars.
SEVENTH: The name and places of residence for each of the
incorporators are as follows:
NAMES PLACES OF RESIDENCE
Dean L. Smith 1800 W. 26th
Topeka, Kansas 66611
Will J. Miller, Jr. 2824 Plass Street
Topeka, Kansas 66611
Everett S. Gille 2832 Plass Street
Topeka, Kansas 66611
EIGHTH: The duration of the corporate existence of the corporation is
one hundred years.
NINTH: The number of directors to constitute the Board of Directors of
the corporation, which shall be a minimum of three and a maximum of nine, may be
varied from time to time by the Board of Directors or stockholders of the
corporation between said minimum and maximum. Unless otherwise provided by the
Bylaws of the corporation, the directors of the corporation need not be
stockholders therein.
TENTH:
(1) Except as may be otherwise specifically provided by (i) statute,
(ii) the Articles of Incorporation of the corporation as from time to time
amended or (iii) bylaw provisions adopted from time to time by the
stockholders or directors of the corporation, all powers of management,
direction and control of the corporation shall be, and hereby are, vested
in the Board of Directors.
(2) If the Bylaws so provide, the Board of Directors, by resolution
adopted by a majority of the whole board, may designate two or more
directors to constitute an executive committee, which committee, to the
extent provided in said resolution or in the Bylaws of the corporation,
shall have and exercise all of the authority of the Board of Directors in
the management of the corporation.
(3) Shares of stock in other corporations shall be voted by the
President or a Vice President, or such officer or officers of the
corporation as the Board of Directors shall from time to time designate for
the purpose, or by a proxy or proxies thereunto duly authorized by the
Board of Directors, except as otherwise ordered by vote of the holders of a
majority of the shares of the capital stock of the corporation outstanding
and entitled to vote in respect thereto.
(4) Subject only to the provisions of the federal Investment Company
Act of 1940 and the rules and regulations promulgated thereunder, any
director, officer or employee individually, or any partnership of which any
director, officer or employee may be a member, or any corporation or
association of which any director, officer or employee may be an officer,
director, trustee, employee or stockholder, may be a party to, or may be
pecuniarily or otherwise interested in, any contract or transaction of the
corporation, and in the absence of fraud no contract or other transaction
shall be thereby affected or invalidated; provided that in case a director,
or a
<PAGE>
partnership, corporation or association of which a director is a member,
officer, director, trustee, employee or stockholder is so interested, such
fact shall be disclosed or shall have been known to the Board of Directors
or a majority thereof; and any director of the corporation who is so
interested, or who is also a director, officer, trustee, employee or
stockholder of such other corporation or association or a member of such
partnership which is so interested, may be counted in determining the
existence of a quorum at any meeting of the Board of Directors of the
corporation which shall authorize any such contract or transaction, and may
vote thereat to authorize any such contract or transaction, with like force
and effect as if he were not such director, officer, trustee, employee or
stockholder of such other corporation or association or not so interested
or a member of a partnership so interested.
(5) The Board of Directors is hereby empowered to authorize the
issuance and sale, from time to time, of shares of the capital stock of the
corporation, whether for cash at not less than the par value thereof or for
such other consideration including securities as the Board of Directors may
deem advisable in the manner and to the extent now or hereafter permitted
by the Bylaws of the corporation and by the laws of Kansas.
ELEVENTH: The private property of the stockholders shall not be a
subject to the payment of the debts of the corporation.
TWELFTH: Insofar as permitted under the laws of Kansas, the
stockholders and directors shall have power to hold their meetings, if the
Bylaws so provide, and to keep the books and records of the corporation outside
of the State of Kansas, and to have one or more offices, within or without the
State of Kansas, at such places as may be from time to time designated in the
Bylaws or by resolution of the stockholders or directors.
THIRTEENTH: Whenever a compromise or arrangement is proposed between
this corporation and its creditors or any class of them, secured or unsecured,
or between this corporation and its stockholders, or any class of them, any
court, state or federal, of competent jurisdiction within the State of Kansas
may on the application in a summary way of this corporation, or of any creditor,
secured or unsecured, or stockholders thereof, or on the application of trustees
in dissolution, or on the application of any receiver or receivers appointed for
this corporation by any court, state or federal, of competent jurisdiction,
order a meeting of the creditors of class of creditors secured or unsecured or
of the stockholders or class of stockholders of the corporation, as the case may
be, to be summoned in such manner as said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors, or
of the stockholders, or class of stockholders of this corporation, as the case
may be, agree to any compromise or arrangement and to any reorganization of this
corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
FOURTEENTH: The corporation reserves the right to alter, amend or
repeal any provision contained in its Articles of Incorporation in the manner
now or hereafter prescribed by the statutes of Kansas, and all rights and powers
conferred herein are granted subject to this reservation; and, in particular,
the corporation reserves the right and privilege to amend its Articles of
Incorporation from time to time so as to authorize other or additional classes
of shares (including preferential shares), to increase or decrease the number of
shares of any class now or hereafter authorized, to establish, limit or deny to
stockholders of any class the right to purchase or subscribe for any shares of
stock of the corporation of any class, whether now or hereafter authorized or
whether issued for cash, property or services or as a dividend or otherwise, or
to purchase or subscribe for any obligations, bonds, notes,
<PAGE>
debentures, or securities or stock convertible into shares of stock of the
corporation or carrying or evidencing any right to purchase shares of stock of
any class, and to vary the preferences, designations, priorities, special
powers, qualifications, limitations, restrictions and the special,
participating, optional or relative rights or other characteristics in respect
of the shares of each class, and to accept and avail itself of, or subject
itself to, the provisions of any statutes of Kansas hereafter enacted pertaining
to private corporations, to exercise all the rights, powers and privileges
conferred upon corporations organized thereunder or accepting the provisions
thereof and to assume the obligations and duties imposed therein, upon the
affirmative vote of the holders of a majority of the shares of stock entitled to
vote thereon, or, in the event the statutes of Kansas then in effect require a
separate vote by classes of shares, upon the affirmative vote of the holders of
a majority of the shares of each class whose separate vote is required thereon,
or, in the event the statutes of Kansas then in effect require a larger vote,
upon such larger vote of the stockholders entitled to vote thereon as may then
be required by such statutes.
IN WITNESS WHEREOF, we have hereunto subscribed our names this 9th day
of September, 1970.
Dean L. Smith
-----------------------------------
Dean L. Smith
Will J. Miller
-----------------------------------
Will J. Miller, Jr.
Everett S. Gille
-----------------------------------
Everett S. Gille
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Personally appeared before me, a notary public in and for Shawnee County,
Kansas, the above named DEAN L. SMITH, WILL J. MILLER and EVERETT S. GILLE, who
are personally known to me to be the same persons who executed the foregoing
instrument of writing, and such persons duly acknowledged the execution of the
same.
IN TESTIMONY WHEREOF, I have hereunto subscribed my name and affixed my official
seal this 9th day of September, 1970.
Lois J. Hedrick
-----------------------------------
Notary Public
My commission expires January 8, 1972
<PAGE>
Topeka, Kansas September 9, 1970
-----------------
Date
OFFICE OF SECRETARY OF STATE
RECEIVED OF SECURITY BOND FUND, INC.
and deposited in the State Treasury, fees on these Articles of Incorporation as
follows:
Application Fee $25.00
Filing and Recording Fee $2.50
Capitalization Fee $1,550.00
Elwill M. Shanahan
-----------------------------------
Secretary of State
<PAGE>
CHANGE OF LOCATION OF REGISTERED OFFICE
AND/OR
CHANGE OF RESIDENT AGENT
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
We, Everett S. Gille, Vice President and Larry D. Armel, Secretary of
Security Bond Fund, Inc. a corporation organized and existing under and by
virtue of the laws of the State of Kansas, do hereby certify that a regular
meeting of the Board of Directors of said corporation held on the 11th day of
July, 1975, the following resolution was duly adopted.
Be it further resolved that the RESIDENT AGENT of said corporation in
the State of Kansas be changed from Will J. Miller, Jr., 700 Harrison Street,
Topeka, Shawnee, Kansas the same being of record in the office of Secretary of
State of Kansas to Security Management Company, Inc. 700 Harrison Street,
Topeka, Shawnee, Kansas 66636.
The President and Secretary are hereby authorized to file and record
the same in the manner as required by law:
Everett S. Gille
-----------------------------------
Everett S. Gille, Vice-President
Larry D. Armel
-----------------------------------
Larry D. Armel, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered that before me Lois J. Hedrick a Notary Public in and for the
County and State aforesaid, came Everett S. Gille, Vice-President and Larry D.
Armel, Secretary, of Security Bond Fund, Inc. a corporation personally known to
me to be the persons who executed the foregoing instrument of writing as vice
president and secretary respectively, and duly acknowledged the execution of the
same this 11th day of July, 1975.
Lois J. Hedrick
-----------------------------------
Notary Public
My commission expires January 8, 1976
NOTE: This form must be filed in duplicate.
Address of Resident Agent and Registered Office, as set forth above,
must be the same.
The statutory fee for filing is $20.00 and must accompany this form.
<PAGE>
CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORPORATION
OF
SECURITY BOND FUND, INC.
- --------------------------------------------------------------------------------
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
We, Everett S. Gille, President, and Lois J. Hedrick, Assistant Secretary
of Security Bond Fund, Inc., a corporation organized and existing under the laws
of the State of Kansas, and whose registered office is Security Benefit Life
Building, 700 Harrison Street, Topeka, Shawnee, Kansas, do hereby certify that
at the regular meeting of the Board of Directors of said corporation held on the
7th day of January, 1977 said board adopted a resolution setting forth the
following amendment to the Articles of Incorporation and declared its
advisability, to wit:
RESOLVED, that whereas the board of directors deems it advisable and
in the best interests of the corporation to increase the authorized
capitalization of the corporation, that the articles of incorporation
of the Fund be amended by deleting the first paragraph of Article
FIFTH in its entirety, and by inserting, in lieu thereof, the
following new first paragraph of Article FIFTH:
FIFTH: The total number of shares which the corporation
shall have authority to issue shall be 6,000,000 shares of
capital stock, each of the par valueof $1.00. The board of
directors shall have the power to fix the consideration to be
received by the corporation for any and all shares of stock
issued by the corporation, but at not less than the par value
thereof.
FURTHER RESOLVED, that the foregoing proposed amendment to the
Articles of Incorporation of the Fund be presented to the stockholders
of the Fund for consideration at the annual meeting of stockholders to
be held on March 25, 1977.
That thereafter, pursuant to said resolution and in accordance with the
by-laws and the laws of the State of Kansas, said directors called a
meeting of stockholders for the consideration of said amendment, and
thereafter, pursuant to said notice and in accordance with the statutes of
the State of Kansas, on the 25th day of March, 1977, said stockholders met
and convened and considered said proposed amendment.
That at said meeting the stockholders entitled to vote did vote upon said
amendment, and the majority of voting stockholders of the corporation had
voted for the proposed amendment certifying that the votes were 534,468
(common) shares in favor of the proposed amendment and 9,925 (common)
against the amendment.
That said amendment was duly adopted in accordance with the provisions of
K.S.A. 17-6602.
That the capital of said corporation will not be reduced under or by reason
of said amendment.
<PAGE>
IN WITNESS WHEREOF we have hereunto set out hands and affixed the seal of
said corporation this 30th day of March, 1977.
Everett S. Gille
------------------------------------
Everett S. Gille, Vice-President
Lois J. Hedrick
------------------------------------
Lois J. Hedrick, Assistant Secretary
STATE OF KANSAS )
) ss
COUNTY OF SHAWNEE)
Be it remembered, that before me, Janet M. Ladd a Notary Public in and for
the County and State aforesaid, came Everett S. Gille, President and Lois J.
Hedrick, Assistant Secretary of Security Bond Fund, Inc. a corporation,
personally known to me to be the persons who executed the foregoing instrument
of writing as president and assistant secretary respectively, and duly
acknowledged the execution of the same this 30th day of March, 1977.
Janet M. Ladd
------------------------------------
Notary Public
My commission expires September 3, 1980.
<PAGE>
CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORPORATION
OF
SECURITY BOND FUND, INC.
- --------------------------------------------------------------------------------
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
We, Everett S. Gille, President, and Larry D. Armel, Secretary of Security
Bond Fund, Inc. a corporation organized and existing under the laws of the State
of Kansas, and whose registered office is Security Benefit Life Building, 700
Harrison Street, Topeka, Shawnee, Kansas, do hereby certify that at the regular
meeting of the Board of Directors of said corporation held on the 5th day of
January, 1979, said board adopted a resolution setting forth the following
amendment to the Articles of Incorporation and declared its advisability, to
wit:
RESOLVED, that whereas the board of directors deems it advisable and
in the best interests of the corporation to increase the authorized
capitalization of the corporation, that the articles of incorporation
of the Fund be amended by deleting the first paragraph of Article
FIFTH in its entirety, and by inserting, in lieu thereof, the
following new first paragraph of Article FIFTH:
FIFTH: The total number of shares which the corporation shall
have authority to issue shall be 10,000,000 shares of capital stock,
each of the par value of $1.00. The board of directors shall have the
power to fix the consideration to be received by the corporation for
any and all shares of stock issued by the corporation, but at not less
than the par value thereof.
FURTHER RESOLVED, that the foregoing proposed amendment to the
Articles of Incorporation of the Fund be presented to the stockholders
of the Fund for consideration at the annual meeting of stockholders to
be held on March 23, 1979.
That thereafter, pursuant to said resolution and in accordance with the
by-laws and the laws of the State of Kansas, said directors called a meeting of
stockholders for the consideration of said amendment, and thereafter, pursuant
to said notice and in accordance with the statutes of the State of Kansas, on
the 23rd day of March, 1979, said stockholders met and convened and considered
said proposed amendment.
That at said meeting the stockholders entitled to vote did vote upon said
amendment, and the majority of voting stockholders of the corporation had voted
for the proposed amendment certifying that the votes were 1,987,933 (common)
shares in favor of the proposed amendment and 95,636 (common) shares against the
amendment.
That said amendment was duly adopted in accordance with the provisions of
K.S.A. 17-6602.
That the capital of said corporation will not be reduced under or by reason
of said amendment.
<PAGE>
IN WITNESS WHEREOF we have hereunto set out hands and affixed the seal of
said corporation this 23rd day of March, 1979.
Everett S. Gille
-----------------------------------
Everett S. Gille, President
Larry D. Armel
-----------------------------------
Larry D. Armel, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, Lois J. Hedrick a Notary Public in
and for the County and State aforesaid, came Everett S. Gille, President and
Larry D. Armel, Secretary of Security Bond Fund, Inc. a corporation, personally
known to me to be the persons who executed the foregoing instrument of writing
as president and assistant secretary respectively, and duly acknowledged the
execution of the same this 23rd day of March, 1979.
Lois J. Hedrick
-----------------------------------
Notary Public
My commission expires January 8, 1980.
<PAGE>
CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORPORATION
OF
SECURITY BOND FUND, INC.
We, Everett S. Gille, President, and Larry D. Armel, Secretary of
Security Bond Fund, Inc., a corporation organized and existing under the laws of
the State of Kansas, and whose registered office is Security Benefit Life
Building, 700 Harrison Street, Topeka, Kansas, 66636, do hereby certify that at
the regular meeting of the board of directors of said corporation held on the
9th day of January, 1981, said board adopted resolutions setting forth the
following amendments to the articles of incorporation and declared their
advisability:
"RESOLVED, that the articles of incorporation of Security Bond Fund,
Inc. as heretofore amended, be further amended by deleting Article
FIRST in its entirety and by inserting, in lieu thereof, the following
new Article FIRST:
`FIRST: The name of the corporation is:
SECURITY BOND FUND.'"
"RESOLVED, that the articles of incorporation of Security Bond Fund,
Inc., as heretofore amended, be further amended by deleting the first
paragraph of Article FIFTH and by inserting, in lieu thereof, the
following:
`FIFTH: The total number of shares which the corporation shall
have authority to issue is 100,000,000 shares of capital stock,
each of the par value of $1.00 per share. The board of directors
shall have the power to fix the consideration to be received by
the corporation for any and all shares of stock issued by the
corporation, but at not less than the par value thereof'.
FURTHER RESOLVED, that the board of directors of this corporation
hereby declares the advisability of the foregoing amendments to
the articles of incorporation of this corporation and hereby
recommends that the stockholders of this corporation adopt said
amendments.
FURTHER RESOLVED, that at the annual meeting of the stockholders
of this corporation to be held at the offices of the corporation
in Topeka, Kansas, on March 27, 1981, beginning at 10:00 a.m. on
that day, the matter of the aforesaid proposed amendments to the
articles of incorporation of this corporation shall be submitted
to the stockholders entitled to vote thereon.
FURTHER RESOLVED, that in the event the stockholders of this
corporation shall approve and adopt the proposed amendments to
the articles of incorporation of this corporation as heretofore
adopted and recommended by this board of directors, the
appropriate officers of this corporation be, and they hereby are
authorized and directed, for and in behalf of this corporation,
to make, execute, verify, acknowledge and file or record in any
and all appropriate governmental offices any and all certificates
and other instruments, and to take any and all other action as
may be necessary to effectuate the said proposed amendments to
the articles of incorporation of this corporation."
<PAGE>
That thereafter, pursuant to said resolutions and in accordance with
the bylaws and the laws of the State of Kansas, said directors called
a meeting of stockholders for the consideration of said amendments and
thereafter, pursuant to said notice and in accordance with the
statutes of the State of Kansas, on the 27th day of March, 1981, said
stockholders met and convened and considered said proposed amendments.
That at said meeting the stockholders entitled to vote did vote upon
the amendment to Article FIRST, and the majority of voting
stockholders of the corporation had voted for the proposed amendment
certifying that the votes were (Common Stock) 2,559,350 shares in
favor of the proposed amendment, (Common Stock) 223,217 shares against
the amendment, and (Common Stock) 477 shares abstained; and
That at said meeting the stockholders entitled to vote did vote upon
the amendment to Article FIFTH, and the majority of voting stockholders of the
corporation had voted for the proposed amendment certifying that the votes were
(Common Stock) 2,546,301 shares in favor of the proposed amendment, (Common
Stock) 236,266 shares against the amendment, and (Common Stock) 477 shares
abstained.
That said amendments were duly adopted in accordance with the
provisions of K.S.A. 16-6602, as amended.
That the capital of said corporation will not be reduced under or by
reason of said amendments.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the
seal of said corporation, this 30th day of March, 1981.
[Seal]
Everett S. Gille
-----------------------------------
Everett S. Gille, President
Larry D. Armel
-----------------------------------
Larry D. Armel, Secretary
<PAGE>
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, Lois J. Hedrick, a Notary Public in
and for the County and State aforesaid, came Everett S. Gille, President, and
Larry D. Armel, Secretary, of Security Bond Fund, Inc., a corporation,
personally known to me to be the persons who executed the foregoing instrument
of writing as president and secretary, respectively, and duly acknowledged the
execution of the same this 30th day of March, 1981.
Lois J. Hedrick
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: January 8, 1984.
Submit in duplicate
A fee of $20.00 must accompany this form.
<PAGE>
CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORPORATION
OF
SECURITY BOND FUND
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
We, Everett S. Gille, President, and Larry D. Armel, Secretary of
Security Bond Fund, Inc., a corporation organized and existing under the laws of
the State of Kansas, and whose registered office is Security Benefit Life
Building, 700 Harrison Street, Topeka, Shawnee, Kansas, do hereby certify that
at the regular meeting of the Board of Directors of said Corporation held on the
7th day of January, 1983, said board adopted resolutions setting forth the
following amendments to the Articles of Incorporation and declared their
advisability, to wit:
"RESOLVED, that the articles of incorporation of Security Bond Fund,
as heretofore amended, be further amended by deleting Article FIFTH in
its entirety and by inserting, in lieu thereof, the following new
Article FIFTH:
`FIFTH: The total number of shares of stock which the Corporation
shall have authority to issue is Five Hundred Million (500,000,000) shares
of common stock, of the par value of One Dollar ($1.00) per share. The
board of directors of the corporation is expressly authorized to cause
shares of common stock of the corporation authorized herein to be issued in
one or more series and to increase or decrease the number of shares so
authorized to be issued in any such series.
The following provisions are hereby adopted for the purpose of setting
forth the powers, rights, qualifications, limitations or restrictions of the
capital stock of the corporation:
(1) At all meetings of stockholders each stockholder of the corporation of
any class or series shall be entitled to one vote in person or by proxy on
each matter submitted to a vote at such meeting for each share of capital
stock of any class or series standing in his name on the books of the
corporation on the date, fixed in accordance with the Bylaws, for
determination of stockholders entitled to vote at such meeting. At all
elections of directors each stockholder of any class or series shall be
entitled to as many votes as shall equal the number of shares of stock of
any class or series multiplied by the number of directors to be elected,
and he may cast all of such votes for a single director or may distribute
them among the number to be voted for, or any two or more of them as he may
see fit.
(2) All shares of stock of the corporation of any class or series shall be
nonassessable.
(3) No holder of any shares of stock of the corporation of any class or
series shall be entitled as such, as a matter of right, to subscribe for or
purchase any shares of stock of the corporation of any class or series,
whether now or hereafter authorized or whether issued for cash, property or
services or as a dividend or otherwise, or to subscribe for or purchase any
obligations, bonds, notes, debentures, other securities or stock
convertible into shares of stock of the corporation of any class or series
or carrying or evidencing any right to purchase shares of stock of any
class or series.
(4) All persons who shall acquire stock in the corporation shall acquire
the same subject to the provisions of these articles of incorporation".
<PAGE>
FURTHER RESOLVED, that the board of directors of this corporation
hereby declares the advisability of the foregoing amendment to the
articles of incorporation of this corporation and hereby recommends
that the stockholders of this corporation adopt said amendment.
FURTHER RESOLVED, that at the annual meeting of the stockholders of
this corporation to be held at the offices of the corporation in
Topeka, Kansas, on March 25, 1983, beginning at 10:00 a.m. on that
day, the matter of the aforesaid proposed amendment to the articles of
incorporation of this corporation shall be submitted to the
stockholders entitled to vote thereon.
FURTHER RESOLVED, that in the event the stockholders of this
corporation shall approve and adopt the proposed amendment to the
articles of incorporation of this corporation as heretofore adopted
and recommended by this board of directors, the appropriate officers
of this corporation be, and they hereby are authorized and directed,
for and in behalf of this corporation, to make, execute, verify,
acknowledge and file or record in any and all appropriate governmental
offices any and all certificates and other instruments, and to take
any and all other action as may be necessary to effectuate the
proposed amendment to the articles of incorporation of this
corporation.
That thereafter, pursuant to said resolution and in accordance with
the by-laws and the laws of the State of Kansas, said directors called a meeting
of stockholders for the consideration of said amendment, and thereafter,
pursuant to said notice and in accordance with the statutes of the State of
Kansas, on the 25th day of March, 1983, said stockholders met and convened and
considered said proposed amendment.
That at said meeting the stockholders entitled to vote did vote upon
said amendment, and the majority of voting stockholders of the corporation had
voted for the proposed amendment certifying that the votes were
3,242,059 Common Stock shares in favor of the proposed amendment,
170,544 Common Stock shares against the amendment, and
3,642 Common Stock shares abstained from voting on the amendment.
That said amendment was duly adopted in accordance with the provisions
of K.S.A. 17-6602, as amended.
That the capital of said corporation will not be reduced under or by
reason of said amendment.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the
seal of said Corporation, this 30th day of March, 1983.
[Seal]
Everett S. Gille
-----------------------------------
Everett S. Gille, President
Larry D. Armel
-----------------------------------
Larry D. Armel, Secretary
<PAGE>
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, Lois J. Hedrick, a Notary Public in
and for the County and State aforesaid, came Everett S. Gille, President, and
Larry D. Armel, Secretary, of Security Bond Fund, a corporation, personally
known to me to be the persons who executed the foregoing instrument of writing
as President and Secretary, respectively, and duly acknowledged the execution of
the same this 30th day of March, 1983.
Lois J. Hedrick
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: January 8, 1984.
Submit to this office in duplicate.
A fee of $20.00 must accompany this form.
<PAGE>
CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORPORATION
OF
SECURITY BOND FUND
We, Everett S. Gille, President, and Barbara W. Rankin, Secretary, of
Security Bond Fund, a corporation organized and existing under the laws of the
State of Kansas, and whose registered office is at 700 Harrison Street, in the
city of Topeka, county of Shawnee, 66636, Kansas, do hereby certify that at the
special meeting of the Board of Directors of said corporation held on the 3rd
day of May, 1985, said board adopted a resolution setting forth the following
amendments to the Articles of Incorporation and declared its advisability:
"RESOLVED, that the articles of incorporation of Security Bond
Fund, as heretofore amended, be further amended by deleting
Article FIRST in its entirety and by inserting, in lieu thereof,
the following new Article FIRST:
"FIRST: The name of the corporation (hereinafter called the
Corporation) is SECURITY INCOME FUND."
FURTHER RESOLVED, that the board of directors of this corporation
hereby declares the advisability of the foregoing amendment to
the articles of incorporation of this corporation and hereby
recommends that the stockholders of this corporation adopt said
amendment.
FURTHER RESOLVED, that in the event the stockholders of this
corporation shall approve and adopt the proposed amendment to the
articles of incorporation of this corporation as heretofore
adopted and recommended by this board of directors, the
appropriate officers of this corporation be, and they hereby are
authorized and directed, for and in behalf of this corporation,
to make, execute, verify, acknowledge and file or record in any
and all appropriate governmental offices any and all certificates
and other instruments, and to take any and all other action as
may be necessary to effectuate the proposed amendment to the
articles of incorporation of this corporation."
We further certify that thereafter, pursuant to said resolution, and
in accordance with the by-laws of the corporation and the laws of the State of
Kansas, the Board of Directors called a meeting of stockholders for
consideration of the proposed amendment, and thereafter, pursuant to notice and
in accordance with the statutes of the State of Kansas, on the 12th day of July,
1985, said stockholders convened and considered the proposed amendment.
We further certify that at said meeting a majority of the stockholders
entitled to vote voted in favor of the proposed amendment, and that the votes
were 2,996,852 common shares in favor of the proposed amendment and 406,842
common shares against the amendment.
We further certify that the amendment was duly adopted in accordance
with the provisions of K.S.A. 17-6602, as amended.
We further certify that the capital of said corporation will not be
reduced under or by reason of said amendment.
IN WITNESS WHEREOF we have hereunto set our hands and affixed the seal
of said corporation this 23rd day of July, 1985.
<PAGE>
[Seal]
Everett S. Gille
-----------------------------------
Everett S. Gille, President
Barbara W. Rankin
-----------------------------------
Barbara W. Rankin, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, a Notary Public in and for the
aforesaid county and state, personally appeared Everett S. Gille, President, and
Barbara W. Rankin, Secretary, of Security Bond Fund, a corporation, who are
known to me to be the same persons who executed the foregoing Certificate of
Amendment to Articles of Incorporation, and duly acknowledged the execution of
the same this 23rd day of July, 1985.
Lois J. Hedrick
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: June 1, 1988
THIS FORM MUST BE SUBMITTED TO THIS OFFICE IN DUPLICATE.
THE FILING FEE OF $20 MUST ACCOMPANY THIS DOCUMENT.
MAIL THIS DOCUMENT, WITH FEE, TO:
Secretary of State
Capitol, 2nd Floor
Topeka, KS 66612
<PAGE>
CERTIFICATE OF
DESIGNATION OF SERIES
OF COMMON STOCK
OF
SECURITY INCOME FUND
STATE OF KANSAS )
)ss.:
COUNTY OF SHAWNEE)
We, Everett S. Gille, President, and Barbara W. Rankin, Secretary, of
Security Income Fund, a corporation organized and existing under the laws of the
State of Kansas, and whose registered office is the Security Benefit Life
Building, 700 Harrison Street, Topeka, Shawnee County, Kansas, do hereby certify
that pursuant to the authority expressly vested in the board of directors by the
provisions of the corporation's articles of incorporation, the board of
directors of said corporation at its regular meeting duly convened and held on
the 3rd day of May, 1985, adopted resolutions establishing two separate series
of common stock of the corporation and setting forth the preferences, rights,
privileges and restrictions of such series, which resolutions provided in their
entirety as follows:
RESOLVED, that, pursuant to Article FIFTH of the Fund's articles of
incorporation, the Fund shall be authorized to issue 200,000 shares of
common stock of the Fund, each of the par value of One Dollar ($1.00)
per share, in the Corporate Bond Series, the investment objective of
which shall be identical to that of current investment objective of
the Fund, to wit: to conserve principal while generating interest
income by investing in upper medium to high-grade debt securities,
primarily those issued by U.S. and Canadian corporations and
securities which are obligations of or guaranteed by the U.S.
Government or any of its agencies. The Fund shall also be authorized
to issue 200,000 shares of common stock of the Fund, each of the par
value of One Dollar ($1.00) per share, in the U.S. Government Series,
the investment objective of which is to provide a high level of
interest income with security of principal by investing in securities
which are guaranteed or issued by the U.S. Government, its agencies or
instrumentalities.
FURTHER RESOLVED, that the powers, rights, qualifications, limitations
and restrictions of the shares of the Fund's series of common stock,
as set forth in the minutes of the January 7, 1983 meeting of this
board of directors, are hereby reaffirmed and incorporated by
reference in the minutes of this meeting.
FURTHER RESOLVED, that the issuance of shares in the above described
series shall take place upon the effectiveness of the Fund's
post-effective amendment, filed with the Securities and Exchange
Commission, updating the material contained in the Fund's registration
statement and reflecting the conversion of the Fund into an investment
company of the Series type, as further authorized below.
FURTHER RESOLVED, that, the appropriate officers of the corporation
be, and they hereby are authorized and directed, for and in behalf of
this corporation, to make, execute, verify, acknowledge and file or
record in any and all appropriate governmental offices any and all
other action as may be necessary to effectuate the proposed
conversion.
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the
seal of the corporation this 26th day of July, 1985.
Everett S. Gille
-----------------------------------
EVERETT S. GILLE, President
Barbara W. Rankin
-----------------------------------
BARBARA W. RANKIN, Secretary
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE)
Be it remembered, that before me, Lois J. Hedrick, a Notary Public in
and for the County and State aforesaid, came EVERETT S. GILLE, President, and
BARBARA W. RANKIN, Secretary, of Security Income Fund, a Kansas corporation,
personally known to me to be the persons who executed the foregoing instrument
of writing as president and secretary, respectively, and duly acknowledged the
execution of the same this 26th day of July, 1985.
Lois J. Hedrick
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: June 1, 1988.
<PAGE>
CERTIFICATE OF DESIGNATION
OF SERIES OF COMMON STOCK
OF
SECURITY INCOME FUND
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE)
We, Everett S. Gille, President, and Barbara W. Rankin, Secretary of
Security Income Fund, a corporation organized and existing under the laws of the
State of Kansas, and whose registered office is the Security Benefit Life
Building, 700 Harrison Street, Topeka, Shawnee County, Kansas, do hereby certify
that pursuant to the authority expressly vested in the board of directors by the
provisions of the corporation's articles of incorporation, the board of
directors of said corporation at its regular meeting duly convened and held on
the 10th day of January, 1986, adopted resolutions establishing a third separate
series of common stock of the corporation and setting forth the preferences,
rights, privileges and restrictions of such series, which resolutions provided
in their entirety as follows:
RESOLVED, that, pursuant to the Article FIFTH of the Fund's articles
of incorporation, the Fund shall be authorized to issue 100,000,000
shares of common stock of the Fund, each of the par value of One
Dollar ($1.00) per share, in the High-Yield Series, the investment
objective of which is to seek high current income by investing in
higher yielding, long-term securities.
FURTHER RESOLVED, that, the powers, rights, qualifications,
limitations and restrictions of the shares of the Fund's series of
common stock, as set forth in the minutes of the January 7, 1983
meeting of this board of directors, are hereby reaffirmed and
incorporated by reference into the minutes of this meeting.
FURTHER RESOLVED, that, the issuance of shares in the above described
series shall take place upon the effectiveness of the Fund's
post-effective amendment, filed with the Securities and Exchange
Commission, updating the material contained in the Fund's registration
statement and reflecting the conversion of the Fund into an investment
company of the Series type, as further authorized below.
FURTHER RESOLVED, that the appropriate officers of the corporation be,
and they hereby are authorized and directed, for and in behalf of this
corporation, to make, execute, verify, acknowledge and file or record
in any and all appropriate governmental offices any and all
appropriate governmental offices any and all other action as may be
necessary to effectuate the proposed conversion.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the
seal of the corporation this 6th day of February, 1986.
Everett S. Gille
-----------------------------------
EVERETT S. GILLE, President
Barbara W. Rankin
-----------------------------------
BARBARA W. RANKIN, Secretary
<PAGE>
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE)
Be it remembered, that before me, Glenda J. Overstreet, a Notary Public in
and for the County and State aforesaid, came EVERETT S. GILLE, President, and
BARBARA W. RANKIN,Secretary, of Security Income Fund, a Kansas corporation,
personally known to me to be the persons who executed the foregoing instrument
of writing as president and secretary, respectively, and duly acknowledged the
execution of the same this 6th day of February, 1986.
Glenda J. Overstreet
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: February 1, 1990
<PAGE>
AMENDED
CERTIFICATE OF DESIGNATION
OF SERIES OF COMMON STOCK
OF
SECURITY INCOME FUND
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE)
We, Everett S. Gille, President, and Barbara W. Rankin, Secretary, of
Security Income Fund, a corporation organized and existing under the laws of the
State of Kansas, and whose registered office is the Security Benefit Life
Building, 700 Harrison Street, Topeka, Shawnee County, Kansas, do hereby certify
that pursuant to the authority expressly vested in the board of directors by the
provisions of the corporation's articles of incorporation, the board of
directors of said corporation at its regular meeting duly convened and held on
the 10th day of January, 1986, adopted resolutions establishing two separate
series of common stock of the corporation and setting forth the preferences,
rights, privileges and restrictions of such series, which resolutions provided
in their entirety as follows:
RESOLVED, that, pursuant to the Article FIFTH of the Fund's articles
of incorporation, the Fund shall be authorized to issue 200,000,000
shares of common stock of the Fund, each of the par value of One
Dollar ($1.00) per share, in the Corporate Bond Series, the investment
objective of which shall be identical to that of current investment
objective of the Fund, to wit: to conserve principal while generating
interest income by investing in upper medium to high-grade debt
securities primarily those issued by U.S. and Canadian corporations
and securities which are obligations of or guaranteed by the U.S.
Government or any of its agencies. The Fund shall also be authorized
to issue 200,000,000 shares of common stock of the Fund, each of the
par value of One Dollar ($1.00) per share, in the U.S. Government
Series, the investment objective of which is to provide a high level
of interest income with security of principal by investing in
securities which are guaranteed or issued by the U.S. Government, its
agencies or instrumentalities.
FURTHER RESOLVED, that, the powers, rights, qualifications,
limitations and restrictions of the shares of the Fund's series of
common stock, as set forth in the minutes of the January 7, 1983
meeting of this board of directors, are hereby reaffirmed and
incorporated by reference into the minutes of this meeting.
FURTHER RESOLVED, that, the issuance of shares in the above described
series shall take place upon the effectiveness of the Fund's
post-effective amendment, filed with the Securities and Exchange
Commission, updating the material contained in the Fund's registration
statement and reflecting the conversion of the Fund into an investment
company of the Series type, as further authorized below.
FURTHER RESOLVED, that the appropriate officers of the corporation be,
and they hereby are authorized and directed, for and in behalf of this
corporation, to make, execute, verify, acknowledge and file or record
in any and all appropriate governmental offices any and all
appropriate governmental offices any and all other action as may be
necessary to effectuate the proposed conversion.
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the
seal of the corporation this 6th day of February, 1986.
Everett S. Gille
-----------------------------------
EVERETT S. GILLE, President
Barbara W. Rankin
-----------------------------------
BARBARA W. RANKIN, Secretary
STATE OF KANSAS )
) ss.:
COUNTY OF SHAWNEE)
Be it remembered, that before me, Glenda J. Overstreet, a Notary
Public in and for the County and State aforesaid, came EVERETT S. GILLE,
President, and BARBARA W. RANKIN, Secretary, of Security Income Fund, a Kansas
corporation, personally known to me to be the persons who executed the foregoing
instrument of writing as president and secretary, respectively, and duly
acknowledged the execution of the same this 6th day of February, 1986.
Glenda J. Overstreet
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: February 1, 1990
<PAGE>
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
OF
SECURITY INCOME FUND
We, Michael J Provines, President , and Amy J. Lee, Secretary of the
above named corporation, a corporation organized and existing under the laws of
the State of Kansas, do hereby certify that at a meeting of the Board of
Directors of said corporation, the board adopted a resolution setting forth the
following amendment to the Articles of Incorporation and declaring its
advisability;
"A director shall not be personally liable to the corporation or to
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this sentence shall not eliminate nor limit the
liability of a director:
A. for any breach of his or her duty of loyalty to the corporation or
to itstockholders:
B. for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
C. for an unlawful dividend, stock purchase or redemption under the
provisions of Kansas Statutes Annotated (K.S.A.) 17-6424 and
amendments thereto; or
D. for any transaction from which the director derived an improper
personal benefit."
We further certify that thereafter, pursuant to said resolution, and in
accordance with the by-laws of the corporation and the laws of the State of
Kansas, the Board of Directors called a meeting of stockholders for
consideration of the proposed amendment, and thereafter, pursuant to notice and
in accordance with the statutes of the State of Kansas, the stockholders
convened and considered the proposed amendment.
We further certify that at the meeting a majority of the stockholders entitled
to vote voted in favor of the proposed amendment.
We further certify that the amendment was duly adopted in accordance with the
provisions of K.S.A. 17-6602, as amended.
We further certify that the capital of said corporation will not be reduced
under or by reason of said amendment.
IN WITNESS WHEREOF, we have hereunto set out hands and affixed the seal of said
corporation this 19th day of April, 1988.
Michael J. Provines
-----------------------------------
Michael J. Provines, President
Amy J. Lee
-----------------------------------
Amy J. Lee, Secretary
<PAGE>
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, a Notary Public in and for the
aforesaid county and state, personally appeared Michael J. Provines, President,
and Amy J. Lee, Secretary, of the corporation named in this document, who are
known to me to be the same persons who executed the foregoing certificate, and
duly acknowledged the execution of the same this 19th day of April, 1988.
Connie Brungardt
-----------------------------------
Notary Public
My Commission Expires: November 30, 1991.
PLEASE SUBMIT THIS DOCUMENT IN DUPLICATE,
WITH $20.00 FILING FEE, TO:
Secretary of State
Capitol. 2nd Floor
Topeka, KS 66612
(913) 296-2236
<PAGE>
CERTIFICATE OF DISSOLUTION
OF SERIES OF COMMON STOCK
OF
SECURITY INCOME FUND
PURSUANT TO K.S.A. SECTION 17-6401(g)
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
We, Michael J. Provines, President, and Amy J. Lee, Secretary, of Security
Income Fund, a corporation organized and existing under the laws of the State of
Kansas, and whose registered office is the Security Benefit Life Building, 700
Harrison Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant
to the authority expressly vested in the Board of Directors by the provisions of
the corporation's Articles of Incorporation, the Board of Directors of said
corporation by unanimous written consent dated December 9, 1991, adopted a
resolution dissolving the High Yield Series of common stock of the corporation,
which resolution provided in its entirety as follows:
RESOLVED, that as of December 9, 1991, there are no authorized shares
of the High Yield Series of Security Income Fund outstanding and none
will be issued in the future.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 9th day of December, 1991.
Michael J. Provines
-----------------------------------
Michael J. Provines, President
Amy J. Lee
-----------------------------------
Amy J. Lee, Secretary
Be it remembered, that on this 9th day of December, 1991, before me, the
undersigned a notary public in and for the county and state aforesaid, came
Michael J. Provines, President, and Amy J. Lee, Secretary of Security Income
Fund, a Kansas corporation, personally known to me to be the persons who
executed the foregoing instrument of writing as President and Secretary,
respectively, and duly acknowledged the execution of the same to be the act and
deed of said corporation.
In testimony whereof, I have hereunto set my hand and affixed my notarial seal
the day and year last above written.
Linda K. Gifford
-----------------------------------
Notary Public
My Commission Expires: November 1, 1993.
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
OF
SECURITY INCOME FUND
We, Michael J Provines, President , and Amy J. Lee, Secretary of the above named
corporation, a corporation organized and existing under the laws of the State of
Kansas, do hereby certify that at a meeting of the Board of Directors of said
corporation, the board adopted a resolution setting forth the following
amendment to the Articles of Incorporation and declaring its advisability:
See attached amendment
We further certify that thereafter, pursuant to said resolution, and in
accordance with the by-laws of the corporation and the laws of the State of
Kansas, the Board of Directors called a meeting of stockholders for
consideration of the proposed amendment, and thereafter, pursuant to notice and
in accordance with the statutes of the State of Kansas, the stockholders
convened and considered the proposed amendment.
We further certify that at a meeting a majority of the stockholders entitled to
vote voted in favor of the proposed amendment.
We further certify that the amendment was duly adopted in accordance with the
provisions of K.S.A. 17-6602, as amended.
IN WITNESS WHEREOF, we have hereunto set out hands and affixed the seal of said
corporation this 27th day of July, 1993.
Michael J. Provines
-----------------------------------
Michael J. Provines, President
Amy J. Lee
-----------------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered that before me, a Notary Public in and for the aforesaid county
and state, personally appeared Michael J. Provines, President, and Amy J. Lee,
Secretary, the corporation named in this document, who are known to me to be the
same persons who executed the foregoing certificate, and duly acknowledged the
execution of the same this 27th day of July, 1993.
Peggy S. Avey
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: November 21, 1996.
PLEASE SUBMIT THIS DOCUMENT IN DUPLICATE,
WITH $20 FILING FEE, TO:
Secretary of State
2nd Floor, State Capitol
Topeka, KS 66612-1594
(913) 296-4564
<PAGE>
SECURITY INCOME FUND
The Board of Directors of Security Income Fund recommends that the Articles of
Incorporation be amended by deleting Article Fifth in its entirety and by
inserting, in lieu therefor, the following new Article:
FIFTH: The total number of shares of stock which the corporation shall have
authority to issue shall be Four Hundred Million (400,000,000) shares of common
stock, each of the par value of One Dollar ($1.00) per share. The board of
directors of the corporation is expressly authorized to cause shares of common
stock of the corporation authorized herein to be issued in one or more classes
or series as may be established from time to time by setting or changing in one
or more respects the voting powers, rights, qualifications, limitations or
restrictions of such shares of stock and to increase or decrease the number of
shares so authorized to be issued in any such class or series.
The following provisions are hereby adopted for the purpose of setting forth the
powers, rights, qualifications, limitations or restrictions of the capital stock
of the corporation (unless provided otherwise by the board of directors with
respect to any such additional class or series at the time of establishing and
designating such additional class or series):
(1) At all meetings of stockholders each stockholder of the corporation of any
class or series shall be entitled to one vote in person or by proxy on each
matter submitted to a vote at such meeting for each share of capital stock
of any class or series standing in the stockholder's name on the books of
the corporation on the date, fixed in accordance with the Bylaws, for
determination of stockholders entitled to vote at such meeting. At all
elections of directors each stockholder of any class or series shall be
entitled to as many votes as shall equal the number of shares of stock of
any class or series multiplied by the number of directors to be elected,
and stockholders may cast all of such votes for a single director or may
distribute them among the number to be voted for, or any two or more of
them as they may see fit.
(2) All shares of stock of the corporation of any class or series shall be
nonassessable.
(3) No holder of any shares of stock of the corporation of any class or series
shall be entitled as such, as a matter of right, to subscribe for or
purchase any shares of stock of the corporation of any class or series,
whether now or hereafter authorized or whether issued for cash, property or
services or as a dividend or otherwise, or to subscribe for or purchase any
obligations, bonds, notes, debentures, other securities or stock
convertible into shares of stock of the corporation of any class or series
or carrying or evidencing any right to purchase shares of stock of any
class or series.
(4) All persons who shall acquire stock in the corporation shall acquire the
same subject to the provisions of these articles of incorporation.
<PAGE>
CERTIFICATE OF DESIGNATION
OF SERIES AND CLASSES OF COMMON STOCK
OF
SECURITY INCOME FUND
STATE OF KANSAS )
)ss.
COUNTY OF SHAWNEE)
We, Michael J. Provines, President, and Brenda M. Luthi, Assistant Secretary, of
Security Income Fund, a corporation organized and existing under the laws of the
State of Kansas, and whose registered office is the Security Benefit Life
Building, 700 Harrison Street, Topeka, Shawnee, Kansas, do hereby certify that
pursuant to the authority expressly vested in the Board of Directors by the
provisions of the corporation's Articles of Incorporation, the Board of
Directors of said corporation at a meeting duly convened and held on the 23rd
day of July, 1993, adopted resolutions establishing two new series of common
stock in addition to those series of common stock currently being issued by the
corporation. Resolutions were also adopted which set forth the preferences,
rights, privileges and restrictions of the separate series of stock of Security
Income Fund, which resolutions are provided in their entirety as follows:
RESOLVED that, pursuant to the authority vested in the Board of Directors of
Security Income Fund by its Articles of Incorporation, the officers of the Fund
are hereby directed and authorized to establish two new series of the Fund and
to redesignate the existing series. The existing series shall be known as
Corporate Bond Series A and U.S. Government Series A. The new series hereby
established shall be known as Corporate Bond Series B and U.S. Government Series
B. The officers of the Fund are hereby directed and authorized to allocate
100,000,000 $1.00 par value shares of the Fund's authorized capital stock of
400,000,000 shares to each series.
FURTHER RESOLVED, that the preferences, rights, privileges and restrictions of
the shares of each series of Security Income Fund shall be as follows:
1. Except as set forth below and as may be hereafter established by the Board
of Directors of the corporation all shares of the corporation, regardless of
series, shall be equal.
2. At all meetings of stockholders each stockholder of the corporation shall be
entitled to one vote in person or by proxy on each matter submitted to a
vote at such meeting for each share of common stock standing in his or her
name on the books of the corporation on the date, fixed in accordance with
the bylaws, for determination of stockholders entitled to vote at such
meeting. At all elections of directors each stockholder shall be entitled to
as many votes as shall equal the number of shares of stock multiplied by the
number of directors to be elected, and he or she may cast all of such votes
for a single director or may distribute them among the number to be voted
for, or any two or more of them as he or she may see fit. Notwithstanding
the foregoing, (i) if any matter is submitted to the stockholders which does
not affect the interest of all series, then only stockholders of the
affected series shall be entitled to vote and (ii) in the event the
Investment Company Act of 1940, as amended, or the rules and regulations
promulgated thereunder shall require a greater or different vote than would
otherwise be required herein or by the Articles of
<PAGE>
Incorporation of the corporation, such greater or different voting
requirement shall also be satisfied.
3. (a) The corporation shall redeem any of its shares for which it has
received payment in full that may be presented to the corporation on
any date after the issue date of any such shares at the net asset value
thereof, such redemption and the valuation and payment in connection
therewith to be made in compliance with the provisions of the
Investment Company Act of 1940 and the Rules and Regulations
promulgated thereunder and with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., as from time to time
amended.
(b) From and after the close of business on the day when the shares are
properly tendered for repurchase the owner shall, with respect of said
shares, cease to be a stockholder of the corporation and shall have
only the right to receive the repurchase price in accordance with the
provisions hereof. The shares so repurchased may, as the Board of
Directors determines, be held in the treasury of the Corporation and
may be resold, or, if the laws of Kansas shall permit, may be retired.
Repurchase of shares is conditional upon the corporation having funds
or property legally available thereof.
4. All shares of the corporation, upon issuance and sale, shall be fully paid,
nonassessable and redeemable. Within the respective series of the
corporation, all shares have equal voting, participation and liquidation
rights, but have no subscription or preemptive rights.
5. (a) Outstanding shares of Corporate Bond Series A and B shall represent
a stockholder interest in a particular fund of assets held by the
corporation which fund shall be invested and reinvested in accordance
with policies and objectives established by the Board of Directors.
Outstanding shares of U.S. Government Series A and B shall represent a
stockholder interest in a particular fund of assets held by the
corporation which fund shall be invested and reinvested in accordance
with policies and objectives established by the Board of Directors.
(b) All cash and other property received by the corporation from the sale
of shares of Corporate Bond Series A and B and the U.S. Government
Series A and B, respectively, all securities and other property held as
a result of the investment and reinvestment of such cash and other
property, all revenues and income received or receivable with respect
to such cash, other property, investments and reinvestments, and all
proceeds derived from the sale, exchange, liquidation or other
disposition of any of the foregoing, shall be allocated to the
Corporate Bond Series A and B or U.S. Government Series A and B to
which they relate and held for the benefit of the stockholders owning
shares of such series.
(c) All losses, liabilities and expenses of the corporation (including
accrued liabilities and expenses and such reserves as the Board of
Directors may determine are appropriate) shall be allocated and charged
to the series to which such loss, liability or expense relates. Where
any loss, liability or expense relates to more than one series, the
Board of Directors shall allocate the same between or among such series
<PAGE>
pro rata based on the respective net asset values of such series or on
such other basis as the Board of Directors deems appropriate.
(d) All allocations made hereunder by the Board of Directors shall be
conclusive and binding upon all stockholders and upon the corporation.
6. Each share of stock of a series shall have the same preferences, rights,
privileges and restrictions as each other share of stock of that series.
Each fractional share of stock of a series proportionately shall have the
same preferences, rights, privileges and restrictions as a whole share.
7. Dividends may be paid when, as and if declared by the Board of Directors out
of funds legally available therefor. Shares of Corporate Bond Series A and B
represent a stockholder interest in a particular fund of assets and,
accordingly, dividends shall be calculated and declared for these series in
the same manner, at the same time, on the same day, and will be paid at the
same dividend rate except that expenses attributable to Corporate Bond
Series A or B and payments made pursuant to a 12b-1 Plan or Shareholder
Services Plan shall be borne exclusively by the affected Corporate Bond
Series. Stockholders of the Corporate Bond Series shall share in dividends
declared and paid with respect to such series pro rata based on their
ownership of shares of such series. Shares of U.S. Government Series A and B
represent a stockholder interest in a particular fund of assets held by the
corporation and, accordingly, dividends shall be calculated and declared for
these series in the same manner, at the same time, on the same day, and
shall be paid at the same dividend rate, except that expenses attributable
to a particular series and payments made pursuant to a 12b-1 Plan or
Shareholder Services Plan shall be borne exclusively by the affected U.S.
Government Series. Stockholders of the U.S. Government Series shall share in
dividends declared and paid with respect to such series pro rata based on
their ownership of shares of such series. Whenever dividends are declared
and paid with respect to the Corporate Bond Series A and B or the U.S.
Government Series A and B, the holders of shares of the other series shall
have no rights in or to such dividends.
8. In the event of liquidation, stockholders of each series shall be entitled
to share in the assets of the corporation that are allocated to such series
and that are available for distribution to the stockholders of such series.
Liquidating distributions shall be made to the stockholders of each series
pro rata based on their share ownership of such series.
9. On the eighth anniversary of the purchase of shares of the Corporate Bond
Series B or the U.S. Government Series B (except those purchased through the
reinvestment of dividends and other distributions) will automatically
convert to Corporate Bond Series A or U.S. Government Series A,
respectively, at the relative net asset values of each of the series without
the imposition of any sales load, fee or other charge. All shares in a
stockholder's account that were purchased through the reinvestment of
dividends and other distributions will be considered to be held in a
separate sub-account. Each time Series B shares are converted to Series A
shares, a pro rata portion of the Series B shares held in the sub-account
will also convert to Series A shares.
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
Corporation this 19th day of October, 1993.
Michael J. Provines
------------------------------------
Michael J. Provines, President
Brenda M. Luthi
------------------------------------
Brenda M. Luthi, Assistant Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, Peggy S. Avey, a Notary Public in and for the
County and State aforesaid, came Michael J. Provines, President, and Brenda M.
Luthi, Assistant Secretary, of Security Income Fund, a Kansas Corporation,
personally known to me to be the persons who executed the foregoing instrument
of writing as President and Secretary, respectively, and duly acknowledged the
execution of the same this 19th day of October, 1993.
Peggy S. Avey
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: November 21, 1996
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
OF
SECURITY INCOME FUND
We, John D. Cleland, President , and Amy J. Lee, Secretary of Security Income
Fund, a corporation organized and existing under the laws of the State of
Kansas, do hereby certify that at a meeting of the Board of Directors of said
corporation, the board adopted a resolution setting forth the following
amendment to the Articles of Incorporation and declaring its advisability:
See attached amendment
We further certify that thereafter, pursuant to said resolution, and in
accordance with the by-laws of the corporation and the laws of the State of
Kansas, the Board of Directors called a meeting of stockholders for
consideration of the proposed amendment, and thereafter, pursuant to notice and
in accordance with the statutes of the State of Kansas, the stockholders
convened and considered the proposed amendment.
We further certify that at a meeting a majority of the stockholders entitled to
vote, voted in favor of the proposed amendment.
We further certify that the amendment was duly adopted in accordance with the
provisions of K.S.A. 17-6602, as amended.
IN WITNESS WHEREOF, we have hereunto set out hands and affixed the seal of the
corporation this 21st day of December, 1994.
John D. Cleland
-----------------------------------
John D. Cleland, President
Amy J. Lee
-----------------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, a Notary Public in and for the aforesaid
county and state, personally appeared John D. Cleland, President, and Amy J.
Lee, Secretary, of Security Income Fund, who are known to me to be the same
persons who executed the foregoing certificate and duly acknowledged the
execution, of the same this 21st day of December, 1994
Judith M. Ralston
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: January 1, 1995.
PLEASE SUBMIT THIS DOCUMENT IN DUPLICATE,
WITH $20 FILING FEE, TO:
Secretary of State
2nd Floor, State Capitol
Topeka, KS 66612-1594
(913) 296-4564
<PAGE>
SECURITY INCOME FUND
The Board of Directors of Security Income Fund recommends that the Articles of
Incorporation be amended by deleting the first paragraph of Article Fifth and by
inserting, in lieu therefor, the following new Article:
FIFTH: The total number of shares of stock which the corporation shall have
authority to issue shall be one billion (1,000,000,000) shares of common
stock, each of the par value of one dollar ($1.00) per share. The board of
directors of the corporation is expressly authorized to cause shares of
common stock of the corporation authorized herein to be issued in one or
more classes or series as may be established from time to time by setting
or changing in one or more respects the voting powers, rights,
qualifications, limitations or restrictions of such shares of stock and to
increase or decrease the number of shares so authorized to be issued in any
such class or series.
<PAGE>
CERTIFICATE OF DESIGNATION
OF SERIES AND CLASSES OF COMMON STOCK
OF
SECURITY INCOME FUND
STATE OF KANSAS )
)ss.
COUNTY OF SHAWNEE)
We, John D. Cleland, President, and Amy J. Lee, Secretary of Security Income
Fund, a corporation organized and existing under the laws of the State of
Kansas, and whose registered office is Security Benefit Life Building, 700
Harrison Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant
to authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at a meeting duly convened and held on the 21st day of October,
1994, adopted resolutions (i) establishing two new series of common stock in
addition to those four series of common stock currently being issued by the
corporation, and (ii) allocating the corporation's authorized capital stock
among the six separate series of common stock of the corporation. Resolutions
were also adopted which for the two new series set forth and for the existing
four series reaffirmed, the preferences, rights, privileges and restrictions of
separate series of stock of Security Income Fund, which resolutions are provided
in their entirety as follows:
WHEREAS, the Board of Directors has approved the establishment of two new series
of common stock of Security Income Fund in addition to the four separate series
of common stock presently issued by the fund designated as U.S. Government
Series A, U.S. Government Series B, Corporate Bond Series A and Corporate Bond
Series B.
WHEREAS, the corporation's shareholders will consider an amendment to the
corporation's articles of incorporation to increase the authorized capital stock
of the corporation from 400,000,000 to 1,000,000,000 shares, at a meeting of
shareholders to be held December 21, 1994; and
WHEREAS, upon approval by shareholders of the proposed amendment to the
corporation's articles of incorporation, the Board of Directors wishes to
reallocate the 1,000,000,000 shares of authorized capital stock among the
series.
NOW, THEREFORE, BE IT RESOLVED, that, the officers of the corporation are hereby
directed and authorized to establish two new series of the Security Income Fund
designated as Limited Maturity Bond Series A and Limited Maturity Bond Series B.
FURTHER RESOLVED, that, upon approval by shareholders of an amendment increasing
the corporation's authorized capital stock from 400,000,000 to 1,000,000,000
shares, the officers of the corporation are hereby directed and authorized to
allocate the corporation's authorized capital stock of 1,000,000,000 shares as
follows: 200,000,000 $1.00 par value shares to each of Corporate Bond Series A
and B; 100,000,000 $1.00 par value shares to each of U.S. Government
Series A and B; 100,000,000 $1.00 par value shares to each of Limited Maturity
Bond Series A and B; and 200,000,000 $1.00 par value shares shall remain
unallocated.
FURTHER RESOLVED, that the preferences, rights, privileges and restrictions of
the shares of each series of Security Income Fund shall be as follows:
1. Except as set forth below and as may be hereafter established by the Board
of Directors of the corporation all shares of the corporation, regardless of
series, shall be equal.
2. At all meetings of stockholders each stockholder of the corporation shall be
entitled to one vote in person or by proxy on each matter submitted to a
vote at such meeting for each share of common stock standing in his or her
name on the books of the corporation on the date, fixed in accordance with
the bylaws, for determination of stockholders entitled to vote at such
meeting. At all elections of directors each stockholder shall be entitled to
as many votes as shall equal the number of shares of stock multiplied by the
number of directors to be elected, and he or she may cast all of such votes
for a single director or may distribute them among the number to be voted
for, or any two or more of them as he or she may see fit. Notwithstanding
the foregoing, (i) if any matter is submitted to the stockholders which does
not affect the interests of all series, then only stockholders of the
affected series shall be entitled to vote and (ii) in the event the
Investment Company Act of 1940, as amended, or the rules and regulations
promulgated thereunder shall require a greater or different vote than would
otherwise be required herein or by the Articles of Incorporation of the
corporation, such greater or different voting requirement shall also be
satisfied.
3. (a) The corporation shall redeem any of its shares for which it has
received payment in full that may be presented to the corporation on
any date after the issue date of any such shares at the net asset value
thereof, such redemption and the valuation and payment in connection
therewith to be made in compliance with the provisions of the
Investment Company Act of 1940 and the Rules and Regulations
promulgated thereunder and with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., as from time to time
amended.
(b) From and after the close of business on the day when the shares are
properly tendered for repurchase the owner shall, with respect of said
shares, cease to be a stockholder of the corporation and shall have
only the right to receive the repurchase price in accordance with the
provisions hereof. The shares so repurchased may, as the Board of
Directors determines, be held in the treasury of the Corporation and
may be resold, or, if the laws of Kansas shall permit, may be retired.
Repurchase of shares is conditional upon the corporation having funds
or property legally available therefor.
4. All shares of the corporation, upon issuance and sale, shall be fully paid,
nonassessable and redeemable. Within the respective series of the
corporation, all shares have equal voting, participation and liquidation
rights, but have no subscription or preemptive rights.
<PAGE>
5. (a) Outstanding shares of Corporate Bond Series A and B shall represent a
stockholder interest in a particular fund of assets held by the
corporation which fund shall be invested and reinvested in accordance
with policies and objectives established by the Board of Directors.
Outstanding shares of U.S. Government Series A and B shall represent a
stockholder interest in a particular fund of assets held by the
corporation which fund shall be invested and reinvested in accordance
with policies and objectives established by the Board of Directors.
Outstanding shares of Limited Maturity Bond Series A and B shall
represent a stockholder interest in a particular fund of assets held by
the corporation which fund shall be invested and reinvested in
accordance with policies and objectives established by the Board of
Directors.
(b) All cash and other property received by the corporation from the sale
of shares of Corporate Bond Series A and B, the U.S. Government Series
A and B, and Limited Maturity Bond Series A and B, respectively, all
securities and other property held as a result of the investment and
reinvestment of such cash and other property, all revenues and income
received or receivable with respect to such cash, other property,
investments and reinvestments, and all proceeds derived from the sale,
exchange, liquidation or other disposition of any of the foregoing,
shall be allocated to the Corporate Bond Series A and B, U.S.
Government Series A and B, or Limited Maturity Bond Series A and B, to
which they relate and held for the benefit of the stockholders owning
shares of such series.
(c) All losses, liabilities and expenses of the corporation (including
accrued liabilities and expenses and such reserves as the Board of
Directors may determine are appropriate) shall be allocated and charged
to the series to which such loss, liability or expense relates. Where
any loss, liability or expense relates to more than one series, the
Board of Directors shall allocate the same between or among such series
pro rata based on the respective net asset values of such series or on
such other basis as the Board of Directors deems appropriate.
(d) All allocations made hereunder by the Board of Directors shall be
conclusive and binding upon all stockholders and upon the corporation.
6. Each share of stock of a series shall have the same preferences, rights,
privileges and restrictions as each other share of stock of that series.
Each fractional share of stock of a series proportionately shall have the
same preferences, rights, privileges and restrictions as a whole share.
7. Dividends may be paid when, as and if declared by the Board of Directors out
of funds legally available therefor. Shares of Corporate Bond Series A and B
represent a stockholder interest in a particular fund of assets and,
accordingly, dividends shall be calculated and declared for these series in
the same manner, at the same time, on the same day, and will be paid at the
same dividend rate except that expenses attributable to Corporate Bond
Series A or B and payments made pursuant to a 12b-1 Plan or Shareholder
Services Plan shall be borne exclusively by the affected Corporate Bond
Series. Stockholders of the Corporate Bond Series shall share in dividends
declared and paid with respect to such series pro rata based on their
ownership of shares of such series. Shares of U.S. Government Series A and B
represent a stockholder interest in a particular fund of assets held by the
corporation and,
<PAGE>
accordingly, dividends shall be calculated and declared for these series in
the same manner, at the same time, on the same day, and shall be paid at the
same dividend rate, except that expenses attributable to a particular series
and payments made pursuant to a 12b-1 Plan or Shareholder Services Plan
shall be borne exclusively by the affected U.S. Government Series.
Stockholders of the U.S. Government Series shall share in dividends declared
and paid with respect to such series pro rata based on their ownership of
shares of such series. Shares of Limited Maturity Bond Series A and B
represent a stockholder interest in a particular fund of assets and,
accordingly, dividends shall be calculated and declared for these series in
the same manner, at the same time, on the same day, and will be paid at the
same dividend rate except that expenses attributable to Limited Maturity
Bond Series A or B and payments made pursuant to a 12b-1 Plan or Shareholder
Services Plan shall be borne exclusively by the affected Limited Maturity
Bond Series. Stockholders of the Limited Maturity Bond Series shall share in
dividends declared and paid with respect to such series pro rata based on
their ownership of shares of such series. Whenever dividends are declared
and paid with respect to the Corporate Bond Series A and B, U.S. Government
Series A and B, or Limited Maturity Bond Series A and B, the holders of
shares of the other series shall have no rights in or to such dividends.
8. In the event of liquidation, stockholders of each series shall be entitled
to share in the assets of the corporation that are allocated to such series
and that are available for distribution to the stockholders of such series.
Liquidating distributions shall be made to the stockholders of each series
pro rata based on their share ownership of such series.
9. On the eighth anniversary of the purchase of shares of the Corporate Bond
Series B, U.S. Government Series B, or Limited Maturity Bond Series B,
(except those purchased through the reinvestment of dividends and other
distributions), such shares will automatically convert to shares of
Corporate Bond Series A, U.S. Government Series A, Limited Maturity Bond
Series A, respectively, at the relative net asset values of each of the
series without the imposition of any sales load, fee or other charge. All
shares in a stockholder's account that were purchased through the
reinvestment of dividends and other distributions paid with respect to
Series B shares will be considered to be held in a separate sub-account.
Each time Series B shares are converted to Series A shares, a pro rata
portion of the Series B shares held in the sub-account will also convert to
Series A shares.
We hereby certify that pursuant to said resolution, and in accordance with the
by-laws of the corporation and the laws of the State of Kansas, the Board of
Directors called a meeting of stockholders for consideration of the proposed
amendment to the articles of incorporation, and thereafter, pursuant to notice
and in accordance with the statutes of the State of Kansas, the stockholders
convened and considered the proposed amendment. We further certify that at the
meeting a majority of the stockholders entitled to vote voted in favor of the
proposed amendment which was duly adopted in accordance with the provisions of
K.S.A. 17-6602, as amended.
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 21st day of December, 1994.
John D. Cleland
-----------------------------------
John D. Cleland, President
Amy J. Lee
-----------------------------------
Amy J. Lee, Secretary
Judith M. Ralston
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: January 1, 1995.
<PAGE>
CERTIFICATE OF DESIGNATION
OF SERIES AND CLASSES OF COMMON STOCK
OF
SECURITY INCOME FUND
STATE OF KANSAS )
)ss.
COUNTY OF SHAWNEE)
We, John D. Cleland, President, and Amy J. Lee, Secretary of Security Income
Fund, a corporation organized and existing under the laws of the State of
Kansas, and whose registered office is Security Benefit Life Building, 700
Harrison Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant
to authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at a meeting duly convened and held on the 3rd day of February,
1995, adopted resolutions (i) establishing two new series of common stock in
addition to those six series of common stock currently being issued by the
corporation, and (ii) allocating the corporation's authorized capital stock
among the eight separate series of common stock of the corporation. Resolutions
were also adopted which for the two new series set forth and for the existing
six reaffirmed the preferences, rights, privileges and restrictions of separate
series of stock of Security Income Fund, which resolutions are provided in their
entirety as follows:
WHEREAS, the Board of Directors has approved the establishment of two new series
of common stock of Security Income Fund in addition to the six separate series
of common stock presently issued by the fund designated as U.S. Government
Series A, U.S. Government Series B, Corporate Bond Series A, Corporate Bond
Series B, Limited Maturity Bond Series A and Limited Maturity Bond Series B.
WHEREAS, the Board of Directors wishes to reallocate the 1,000,000,000 shares of
authorized capital stock among the series.
NOW, THEREFORE, BE IT RESOLVED, that, the officers of the corporation are hereby
directed and authorized to establish two new series of the Security Income Fund
designated as Global Aggressive Bond Series A and Global Aggressive Bond Series
B.
FURTHER RESOLVED, that, the officers of the corporation are hereby directed and
authorized to allocate the corporation's authorized capital stock of
1,000,000,000 shares as follows: 200,000,000 $1.00 par value shares to each of
Corporate Bond Series A and B; 100,000,000 $1.00 par value shares to each of
U.S. Government Series A and B; 100,000,000 $1.00 par value shares to each of
Limited Maturity Bond Series A and B; and 100,000,000 $1.00 par value shares to
each of Global Aggressive Bond Series A and B.
<PAGE>
FURTHER RESOLVED, that the preferences, rights, privileges and restrictions of
the shares of each series of Security Income Fund shall be as follows:
1. Except as set forth below and as may be hereafter established by the Board
of Directors of the corporation all shares of the corporation, regardless of
series, shall be equal.
2. At all meetings of stockholders each stockholder of the corporation shall be
entitled to one vote in person or by proxy on each matter submitted to a
vote at such meeting for each share of common stock standing in his or her
name on the books of the corporation on the date, fixed in accordance with
the bylaws, for determination of stockholders entitled to vote at such
meeting. At all elections of directors each stockholder shall be entitled to
as many votes as shall equal the number of shares of stock multiplied by the
number of directors to be elected, and he or she may cast all of such votes
for a single director or may distribute them among the number to be voted
for, or any two or more of them as he or she may see fit. Notwithstanding
the foregoing, (i) if any matter is submitted to the stockholders which does
not affect the interests of all series, then only stockholders of the
affected series shall be entitled to vote and (ii) in the event the
Investment Company Act of 1940, as amended, or the rules and regulations
promulgated thereunder shall require a greater or different vote than would
otherwise be required herein or by the Articles of Incorporation of the
corporation, such greater or different voting requirement shall also be
satisfied.
3. (a) The corporation shall redeem any of its shares for which it has
received payment in full that may be presented to the corporation on
any date after the issue date of any such shares at the net asset value
thereof, such redemption and the valuation and payment in connection
therewith to be made in compliance with the provisions of the
Investment Company Act of 1940 and the Rules and Regulations
promulgated thereunder and with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., as from time to time
amended.
(b) From and after the close of business on the day when the shares are
properly tendered for repurchase the owner shall, with respect of said
shares, cease to be a stockholder of the corporation and shall have
only the right to receive the repurchase price in accordance with the
provisions hereof. The shares so repurchased may, as the Board of
Directors determines, be held in the treasury of the Corporation and
may be resold, or, if the laws of Kansas shall permit, may be retired.
Repurchase of shares is conditional upon the corporation having funds
or property legally available therefor.
4. All shares of the corporation, upon issuance and sale, shall be fully paid,
nonassessable and redeemable. Within the respective series of the
corporation, all shares have equal voting, participation and liquidation
rights, but have no subscription or preemptive rights.
<PAGE>
5. (a) Outstanding shares of Corporate Bond Series A and B shall represent a
stockholder interest in a particular fund of assets held by the
corporation which fund shall be invested and reinvested in accordance
with policies and objectives established by the Board of Directors.
Outstanding shares of U.S. Government Series A and B shall represent a
stockholder interest in a particular fund of assets held by the
corporation which fund shall be invested and reinvested in accordance
with policies and objectives established by the Board of Directors.
Outstanding shares of Limited Maturity Bond Series A and B shall
represent a stockholder interest in a particular fund of assets held by
the corporation which fund shall be invested and reinvested in
accordance with policies and objectives established by the Board of
Directors. Outstanding shares of Global Aggressive Bond Series A and B
shall represent a stockholder interest in a particular fund of assets
held by the corporation which fund shall be invested and reinvested in
accordance with policies and objectives established by the Board of
Directors.
(b) All cash and other property received by the corporation from the sale
of shares of Corporate Bond Series A and B, the U.S. Government Series
A and B, Limited Maturity Bond Series A and B, and Global Aggressive
Bond Series A and B respectively, all securities and other property
held as a result of the investment and reinvestment of such cash and
other property, all revenues and income received or receivable with
respect to such cash, other property, investments and reinvestments,
and all proceeds derived from the sale, exchange, liquidation or other
disposition of any of the foregoing, shall be allocated to the
Corporate Bond Series A and B, U.S. Government Series A and B, or
Limited Maturity Bond Series A and B, or Global Aggressive Bond Series
A and B, to which they relate and held for the benefit of the
stockholders owning shares of such series.
(c) All losses, liabilities and expenses of the corporation (including
accrued liabilities and expenses and such reserves as the Board of
Directors may determine are appropriate) shall be allocated and charged
to the series to which such loss, liability or expense relates. Where
any loss, liability or expense relates to more than one series, the
Board of Directors shall allocate the same between or among such series
pro rata based on the respective net asset values of such series or on
such other basis as the Board of Directors deems appropriate.
(d) All allocations made hereunder by the Board of Directors shall be
conclusive and binding upon all stockholders and upon the corporation.
6. Each share of stock of a series shall have the same preferences, rights,
privileges and restrictions as each other share of stock of that series.
Each fractional share of stock of a series proportionately shall have the
same preferences, rights, privileges and restrictions as a whole share.
7. Dividends may be paid when, as and if declared by the Board of Directors out
of funds legally available therefor. Shares of Corporate Bond Series A and B
represent a stockholder interest in a particular fund of assets and,
accordingly, dividends shall be calculated and declared for these series in
the same manner, at the same time, on the same day, and will be paid at the
same dividend rate except that expenses attributable to Corporate Bond
Series A
<PAGE>
or B and payments made pursuant to a 12b-1 Plan or Shareholder Services Plan
shall be borne exclusively by the affected Corporate Bond Series.
Stockholders of the Corporate Bond Series shall share in dividends declared
and paid with respect to such series pro rata based on their ownership of
shares of such series. Shares of U.S. Government Series A and B represent a
stockholder interest in a particular fund of assets held by the corporation
and, accordingly, dividends shall be calculated and declared for these
series in the same manner, at the same time, on the same day, and shall be
paid at the same dividend rate, except that expenses attributable to a
particular series and payments made pursuant to a 12b-1 Plan or Shareholder
Services Plan shall be borne exclusively by the affected U.S. Government
Series. Stockholders of the U.S. Government Series shall share in dividends
declared and paid with respect to such series pro rata based on their
ownership of shares of such series. Shares of Limited Maturity Bond Series A
and B represent a stockholder interest in a particular fund of assets and,
accordingly, dividends shall be calculated and declared for these series in
the same manner, at the same time, on the same day, and will be paid at the
same dividend rate except that expenses attributable to Limited Maturity
Bond Series A or B and payments made pursuant to a 12b-1 Plan or Shareholder
Services Plan shall be borne exclusively by the affected Limited Maturity
Bond Series. Stockholders of the Limited Maturity Bond Series shall share in
dividends declared and paid with respect to such series pro rata based on
their ownership of shares of such series. Shares of Global Aggressive Bond
Series A and B represent a stockholder interest in a particular fund of
assets and accordingly, dividends shall be calculated and declared for these
series in the same manner, at the same time, on the same day, and will be
paid at the same dividend rate except that expenses attributable to Global
Aggressive Bond Series A or B and payments made pursuant to a 12b-1 Plan or
Shareholder Services Plan shall be born exclusively by the affected Global
Aggressive Bond Series. Stockholders of the Global Aggressive Bond Series A
and B shall share in dividends declared and paid with respect to such series
pro rata based on their ownership of shares of such series. Whenever
dividends are declared and paid with respect to the Corporate Bond Series A
and B, U.S. Government Series A and B, Limited Maturity Bond Series A and B,
or Global Aggressive Bond Series A and B, the holders of shares of the other
series shall have no rights in or to such dividends.
8. In the event of liquidation, stockholders of each series shall be entitled
to share in the assets of the corporation that are allocated to such series
and that are available for distribution to the stockholders of such series.
Liquidating distributions shall be made to the stockholders of each series
pro rata based on their share ownership of such series.
9. On the eighth anniversary of the purchase of shares of the Corporate Bond
Series B, U.S. Government Series B, Limited Maturity Bond Series B, or
Global Aggressive Bond Series B, (except those purchased through the
reinvestment of dividends and other distributions), such shares will
automatically convert to shares of Corporate Bond Series A, U.S. Government
Series A, Limited Maturity Bond Series A, or Global Aggressive Bond Series A
respectively, at the relative net asset values of each of the series without
the imposition of any sales load, fee or other charge. All shares in a
stockholder's account that were purchased through the reinvestment of
dividends and other distributions paid with respect to Series B shares will
be considered to be held in a separate sub-account. Each time Series B
shares are converted to Series A shares, a pro rata portion of the Series B
shares held in the sub-account will also convert to Series A shares.
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 3rd day of February, 1995.
John D. Cleland
-----------------------------------
John D. Cleland, President
Amy J. Lee
-----------------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, Connie Brungardt a Notary Public in and for
the County and State aforesaid, came JOHN D. CLELAND, President, and AMY J. LEE,
Secretary, of Security Income Fund, a Kansas corporation, personally known to me
to be the persons who executed the foregoing instrument of writing as President
and Secretary, respectively, and duly acknowledged the execution, of the same
this 3rd day of February, 1995.
Connie Brungardt
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: November 30, 1998
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
OF
SECURITY INCOME FUND
We, John D. Cleland, President , and Amy J. Lee, Secretary of Security Income
Fund, a corporation organized and existing under the laws of the State of
Kansas, do hereby certify that at a regular meeting of the Board of Directors of
said corporation, held on the 2nd day of February, 1996, the board adopted a
resolution setting forth the following amendment to the Articles of
Incorporation and declaring its advisability:
RESOLVED
The Board of Directors of Security Income Fund recommends that the Articles of
Incorporation be amended by deleting Article Fifth in its entirety and by
inserting, in lieu thereof, the following new Article:
FIFTH: The corporation shall have authority to issue an indefinite number of
shares of common stock, of the par value of one dollar ($1.00) per share. The
board of directors of the Corporation is expressly authorized to cause shares of
common stock of the Corporation authorized herein to be issued in one or more
series as may be established from time to time by setting or changing in one or
more respects the voting powers, rights, qualifications, limitations or
restrictions of such shares of stock and to increase or decrease the number of
shares so authorized to be issued in any such series.
We further certify that the amendment was duly adopted in accordance with the
provisions of K.S.A. 17-6602, as amended.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of said
corporation this 2nd day of February, 1996.
John D. Cleland
-----------------------------------
John D. Cleland, President
Amy J. Lee
-----------------------------------
Amy J. Lee, Secretary
<PAGE>
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
BE IT REMEMBERED, that before me, L. Charmaine Lucas, a Notary Public in and for
the aforesaid county and state, personally appeared John D. Cleland, President,
and Amy J. Lee, Secretary, of Security Income Fund, who are known to me to be
the same persons who executed the foregoing certificate and duly acknowledged
the execution of the same this 2nd day of February, 1996.
L. Charmaine Lucas
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: April 1, 1998
PLEASE SUBMIT THIS DOCUMENT IN DUPLICATE,
WITH $20 FILING FEE, TO:
Secretary of State
2nd Floor, State Capitol
Topeka, KS 66612-1594
<PAGE>
CERTIFICATE OF DESIGNATIONS
OF COMMON STOCK
OF
SECURITY INCOME FUND
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
We, John D. Cleland, President, and Amy J. Lee, Secretary of Security Income
Fund, a corporation organized and existing under the laws of the State of
Kansas, and whose registered office is Security Benefit Life Building, 700
Harrison Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant
to authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at a meeting duly convened and held on the 2nd day of February,
1996, adopted resolutions authorizing the corporation to issue an indefinite
number of shares of capital stock of each of the eight series of common stock of
the corporation. Resolutions were also adopted which reaffirmed the preferences,
rights, privileges and restrictions of separate series of stock of Security
Income Fund, which resolutions are provided in their entirety as follows:
WHEREAS, K.S.A. 17-6602 has been amended to allow the board of directors of a
corporation that is registered as an open-end investment company under the
Investment Company Act of 1940 (the "1940 Act") to approve, by resolution, an
amendment of the corporation's Articles of Incorporation, to allow the issuance
of an indefinite number of shares of the capital stock of the corporation;
WHEREAS, the corporation is registered as an open-end investment company under
the 1940 Act; and
WHEREAS, the Board of Directors desire to authorize the issuance of an
indefinite number of shares of capital stock of each of the eight series of
common stock of the corporation;
NOW THEREFORE BE IT RESOLVED, that, the officers of the corporation are hereby
directed and authorized to issue an indefinite number of $1.00 par value shares
of capital stock of each series of the corporation, which consist of U.S.
Government Series A, U.S. Government Series B, Corporate Bond Series A,
Corporate Bond Series B, Limited Maturity Bond Series A, Limited Maturity Bond
Series B, Global Aggressive Bond Series A, and Global Aggressive Bond Series B;
<PAGE>
FURTHER RESOLVED, that, the preferences, rights, privileges and restrictions of
the shares of each of the corporation's series of common stock, as set forth in
the minutes of the February 3, 1995, meeting of this Board of Directors, are
hereby reaffirmed and incorporated by reference into the minutes of this
meeting; and
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolutions to become effective.
The undersigned do hereby certify that the foregoing amendment to the
corporation's Articles of Incorporation has been duly adopted in accordance with
the provisions of K.S.A. 17-6602.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 2nd day of February, 1996.
John D. Cleland
-----------------------------------
John D. Cleland, President
Amy J. Lee
-----------------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, L. Charmaine Lucas, a Notary Public in and for
the aforesaid County and State, came John D. Cleland, President, and Amy J. Lee,
Secretary, of Security Income Fund, a Kansas corporation, personally known to me
to be the same persons who executed the foregoing instrument of writing and duly
acknowledged the execution of the same this 2nd day of February, 1996.
L. Charmaine Lucas
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: April 1, 1998
<PAGE>
CERTIFICATE OF DESIGNATION
OF SERIES AND CLASSES OF COMMON STOCK
OF
SECURITY INCOME FUND
STATE OF KANSAS )
)ss.
COUNTY OF SHAWNEE)
We, John D. Cleland, President, and Amy J. Lee, Secretary of Security Income
Fund, a corporation organized and existing under the laws of the State of
Kansas, and whose registered office is Security Benefit Life Building, 700
Harrison Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant
to authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at a meeting duly convened and held on the 3rd day of May, 1996,
adopted resolutions (i) establishing two new series of common stock in addition
to those eight series of common stock currently being issued by the corporation,
and (ii) allocating the corporation's authorized capital stock among the ten
separate series of common stock of the corporation. Resolutions were also
adopted which for the two new series set forth and for the existing eight
reaffirmed the preferences, rights, privileges and restrictions of separate
series of stock of Security Income Fund, which resolutions are provided in their
entirety as follows:
WHEREAS, the Board of Directors has approved the establishment of two new series
of common stock of Security Income Fund in addition to the eight separate series
of common stock presently issued by the fund designated as Corporate Bond Series
A, Corporate Bond Series B, U.S. Government Series A, U.S. Government Series B,
Limited Maturity Bond Series A, Limited Maturity Bond Series B, Global
Aggressive Bond Series A and Global Aggressive Bond Series B; and
WHEREAS, the Board of Directors desires to authorize the issuance of an
indefinite number of shares of capital stock of each of the ten series of common
stock of the corporation.
NOW, THEREFORE, BE IT RESOLVED, that, the officers of the corporation are hereby
directed and authorized to establish two new series of the Security Income Fund
designated as High Yield Series A and High Yield Series B.
FURTHER RESOLVED, that, the officers of the corporation are hereby directed and
authorized to issue an indefinite number of $1.00 par value shares of capital
stock of each series of the corporation, which consist of Corporate Bond Series
A, Corporate Bond Series B, U.S. Government Series A, U.S. Government Series B,
Limited Maturity Bond Series A, Limited Maturity Bond Series B, Global
Aggressive Bond Series A, Global Aggressive Bond Series B, High Yield Series A
and High Yield Series B.
<PAGE>
FURTHER RESOLVED, that the preferences, rights, privileges and restrictions of
the shares of each series of Security Income Fund shall be as follows:
1. Except as set forth below and as may be hereafter established by the Board
of Directors of the corporation all shares of the corporation, regardless of
series, shall be equal.
2. At all meetings of stockholders each stockholder of the corporation shall be
entitled to one vote in person or by proxy on each matter submitted to a
vote at such meeting for each share of common stock standing in his or her
name on the books of the corporation on the date, fixed in accordance with
the bylaws, for determination of stockholders entitled to vote at such
meeting. At all elections of directors each stockholder shall be entitled to
as many votes as shall equal the number of shares of stock multiplied by the
number of directors to be elected, and he or she may cast all of such votes
for a single director or may distribute them among the number to be voted
for, or any two or more of them as he or she may see fit. Notwithstanding
the foregoing, (i) if any matter is submitted to the stockholders which does
not affect the interests of all series, then only stockholders of the
affected series shall be entitled to vote and (ii) in the event the
Investment Company Act of 1940, as amended, or the rules and regulations
promulgated thereunder shall require a greater or different vote than would
otherwise be required herein or by the Articles of Incorporation of the
corporation, such greater or different voting requirement shall also be
satisfied.
3. (a) The corporation shall redeem any of its shares for which it has
received payment in full that may be presented to the corporation on
any date after the issue date of any such shares at the net asset value
thereof, such redemption and the valuation and payment in connection
therewith to be made in compliance with the provisions of the
Investment Company Act of 1940 and the Rules and Regulations
promulgated thereunder and with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., as from time to time
amended.
(b) From and after the close of business on the day when the shares are
properly tendered for repurchase the owner shall, with respect of said
shares, cease to be a stockholder of the corporation and shall have
only the right to receive the repurchase price in accordance with the
provisions hereof. The shares so repurchased may, as the Board of
Directors determines, be held in the treasury of the Corporation and
may be resold, or, if the laws of Kansas shall permit, may be retired.
Repurchase of shares is conditional upon the corporation having funds
or property legally available therefor.
4. All shares of the corporation, upon issuance and sale, shall be fully paid,
nonassessable and redeemable. Within the respective series of the
corporation, all shares have equal voting, participation and liquidation
rights, but have no subscription or preemptive rights.
<PAGE>
5. (a) Outstanding shares of Corporate Bond Series A and B shall represent a
stockholder interest in a particular fund of assets held by the
corporation which fund shall be invested and reinvested in accordance
with policies and objectives established by the Board of Directors.
Outstanding shares of U.S. Government Series A and B shall represent a
stockholder interest in a particular fund of assets held by the
corporation which fund shall be invested and reinvested in accordance
with policies and objectives established by the Board of Directors.
Outstanding shares of Limited Maturity Bond Series A and B shall
represent a stockholder interest in a particular fund of assets held by
the corporation which fund shall be invested and reinvested in
accordance with policies and objectives established by the Board of
Directors. Outstanding shares of Global Aggressive Bond Series A and B
shall represent a stockholder interest in a particular fund of assets
held by the corporation which fund shall be invested and reinvested in
accordance with policies and objectives established by the Board of
Directors. Outstanding shares of High Yield Series A and B shall
represent a stockholder interest in a particular fund of assets held by
the corporation which fund shall be invested and reinvested in
accordance with policies and objectives established by the Board of
Directors.
(b) All cash and other property received by the corporation from the sale
of shares of Corporate Bond Series A and B, the U.S. Government Series
A and B, Limited Maturity Bond Series A and B, Global Aggressive Bond
Series A and B, and High Yield Series A and B, respectively, all
securities and other property held as a result of the investment and
reinvestment of such cash and other property, all revenues and income
received or receivable with respect to such cash, other property,
investments and reinvestments, and all proceeds derived from the sale,
exchange, liquidation or other disposition of any of the foregoing,
shall be allocated to the Corporate Bond Series A and B, U.S.
Government Series A and B, or Limited Maturity Bond Series A and B,
Global Aggressive Bond Series A and B, or High Yield Series A and B, to
which they relate and held for the benefit of the stockholders owning
shares of such series.
(c) All losses, liabilities and expenses of the corporation (including
accrued liabilities and expenses and such reserves as the Board of
Directors may determine are appropriate) shall be allocated and charged
to the series to which such loss, liability or expense relates. Where
any loss, liability or expense relates to more than one series, the
Board of Directors shall allocate the same between or among such series
pro rata based on the respective net asset values of such series or on
such other basis as the Board of Directors deems appropriate.
(d) All allocations made hereunder by the Board of Directors shall be
conclusive and binding upon all stockholders and upon the corporation.
6. Each share of stock of a series shall have the same preferences, rights,
privileges and restrictions as each other share of stock of that series.
Each fractional share of stock of a series proportionately shall have the
same preferences, rights, privileges and restrictions as a whole share.
<PAGE>
7. Dividends may be paid when, as and if declared by the Board of Directors out
of funds legally available therefor. Shares of Corporate Bond Series A and B
represent a stockholder interest in a particular fund of assets and,
accordingly, dividends shall be calculated and declared for these series in
the same manner, at the same time, on the same day, and will be paid at the
same dividend rate except that expenses attributable to Corporate Bond
Series A or B and payments made pursuant to a 12b-1 Plan or Shareholder
Services Plan shall be borne exclusively by the affected Corporate Bond
Series. Stockholders of the Corporate Bond Series shall share in dividends
declared and paid with respect to such series pro rata based on their
ownership of shares of such series. Shares of U.S. Government Series A and B
represent a stockholder interest in a particular fund of assets held by the
corporation and, accordingly, dividends shall be calculated and declared for
these series in the same manner, at the same time, on the same day, and
shall be paid at the same dividend rate, except that expenses attributable
to a particular series and payments made pursuant to a 12b-1 Plan or
Shareholder Services Plan shall be borne exclusively by the affected U.S.
Government Series. Stockholders of the U.S. Government Series shall share in
dividends declared and paid with respect to such series pro rata based on
their ownership of shares of such series. Shares of Limited Maturity Bond
Series A and B represent a stockholder interest in a particular fund of
assets and, accordingly, dividends shall be calculated and declared for
these series in the same manner, at the same time, on the same day, and will
be paid at the same dividend rate except that expenses attributable to
Limited Maturity Bond Series A or B and payments made pursuant to a 12b-1
Plan or Shareholder Services Plan shall be borne exclusively by the affected
Limited Maturity Bond Series. Stockholders of the Limited Maturity Bond
Series shall share in dividends declared and paid with respect to such
series pro rata based on their ownership of shares of such series. Shares of
Global Aggressive Bond Series A and B represent a stockholder interest in a
particular fund of assets and accordingly, dividends shall be calculated and
declared for these series in the same manner, at the same time, on the same
day, and will be paid at the same dividend rate except that expenses
attributable to Global Aggressive Bond Series A or B and payments made
pursuant to a 12b-1 Plan or Shareholder Services Plan shall be born
exclusively by the affected Global Aggressive Bond Series. Stockholders of
the Global Aggressive Bond Series A and B shall share in dividends declared
and paid with respect to such series pro rata based on their ownership of
shares of such series. Shares of High Yield Series A and B represent a
stockholder interest in a particular fund of assets and, accordingly,
dividends shall be calculated and declared for these series in the same
manner, at the same time, on the same day, and will be paid at the same
dividend rate except that expenses attributable to High Yield Series A or B
and payments made pursuant to a 12b-1 Plan or Shareholder Services Plan
shall be borne exclusively by the affected High Yield Series. Stockholders
of the High Yield Series shall share in dividends declared and paid with
respect to such series pro rata based on their ownership of shares of such
series. Whenever dividends are declared and paid with respect to the
Corporate Bond Series A and B, U.S. Government Series A and B, Limited
Maturity Bond Series A and B, Global Aggressive Bond Series A and B, or High
Yield Series A and B, the holders of shares of the other series shall have
no rights in or to such dividends.
8. In the event of liquidation, stockholders of each series shall be entitled
to share in the assets of the corporation that are allocated to such series
and that are available for distribution to the stockholders of such series.
Liquidating distributions shall be made to the stockholders of each series
pro rata based on their share ownership of such series.
<PAGE>
9. On the eighth anniversary of the purchase of shares of the Corporate Bond
Series B, U.S. Government Series B, Limited Maturity Bond Series B, Global
Aggressive Bond Series B, or High Yield Series B, (except those purchased
through the reinvestment of dividends and other distributions), such shares
will automatically convert to shares of Corporate Bond Series A, U.S.
Government Series A, Limited Maturity Bond Series A, Global Aggressive Bond
Series A, or High Yield Series A, respectively, at the relative net asset
values of each of the series without the imposition of any sales load, fee
or other charge. All shares in a stockholder's account that were purchased
through the reinvestment of dividends and other distributions paid with
respect to Series B shares will be considered to be held in a separate
sub-account. Each time Series B shares are converted to Series A shares, a
pro rata portion of the Series B shares held in the sub-account will also
convert to Series A shares.
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolutions to become effective.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 13th day of May, 1996.
John D. Cleland
-----------------------------------
John D. Cleland, President
Amy J. Lee
-----------------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, Jana R. Selley a Notary Public in and for the
County and State aforesaid, came JOHN D. CLELAND, President, and AMY J. LEE,
Secretary, of Security Income Fund, a Kansas corporation, personally known to me
to be the persons who executed the foregoing instrument of writing as President
and Secretary, respectively, and duly acknowledged the execution of the same
this 13th day of May, 1996.
Jana R. Selley
-----------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires: June 14, 1996
<PAGE>
CERTIFICATE OF DESIGNATION
OF SERIES OF COMMON STOCK
OF
SECURITY INCOME FUND
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
We, John D. Cleland, President, and Amy J. Lee, Secretary of Security Income
Fund, a corporation organized and existing under the laws of the State of
Kansas, and whose registered office is Security Benefit Life Building, 700
Harrison Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant
to authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at a meeting duly convened and held on the 7th day of February,
1997, adopted resolutions (i) establishing four new series of common stock in
addition to those ten series of common stock currently being issued by the
corporation, and (ii) allocating the corporation's authorized capital stock
among the fourteen separate series of common stock of the corporation.
Resolutions were also adopted, which for the four new series set forth and for
the existing ten reaffirmed the preferences, rights, privileges and restrictions
of separate series of stock of Security Income Fund, which resolutions are
provided in their entirety as follows:
WHEREAS, the Board of Directors has approved the establishment of four new
series of common stock of Security Income Fund in addition to the ten separate
series of common stock presently issued by the fund designated as Corporate Bond
Series A, Corporate Bond Series B, U.S. Government Series A, U.S. Government
Series B, Limited Maturity Bond Series A, Limited Maturity Bond Series B, Global
Aggressive Bond Series A, Global Aggressive Bond Series B, High Yield Series A
and High Yield Series B; and
WHEREAS, the Board of Directors desires to authorize the issuance of an
indefinite number of shares of capital stock of each of the fourteen series of
common stock of the corporation.
NOW, THEREFORE, BE IT RESOLVED, that, the officers of the corporation are hereby
directed and authorized to establish four new series of Security Income Fund
designated as Emerging Markets Total Return Series A, Emerging Markets Total
Return Series B, Global Asset Allocation Series A and Global Asset Allocation
Series B.
FURTHER RESOLVED, that, the officers of the corporation are hereby directed and
authorized to issue an indefinite number of $1.00 par value shares of capital
stock of each series of the corporation, which consist of Corporate Bond Series
A, Corporate Bond Series B, U.S. Government Series A, U.S. Government Series B,
Limited Maturity Bond Series A, Limited Maturity Bond Series B, Global
Aggressive Bond Series A, Global Aggressive Bond Series B, High Yield Series A,
High Yield Series B, Emerging Markets Total Return Series A, Emerging Markets
Total Return Series B, Global Asset Allocation Series A and Global Asset
Allocation Series B.
FURTHER RESOLVED, that the preferences, rights, privileges and restrictions of
the shares of each series of Security Income Fund shall be as follows:
1. Except as set forth below and as may be hereafter established by the Board
of Directors of the corporation all shares of the corporation, regardless
of series, shall be equal.
<PAGE>
2. At all meetings of stockholders each stockholder of the corporation shall
be entitled to one vote in person or by proxy on each matter submitted to a
vote at such meeting for each share of common stock standing in his or her
name on the books of the corporation on the date, fixed in accordance with
the bylaws, for determination of stockholders entitled to vote at such
meeting. At all elections of directors each stockholder shall be entitled
to as many votes as shall equal the number of shares of stock multiplied by
the number of directors to be elected, and he or she may cast all of such
votes for a single director or may distribute them among the number to be
voted for, or any two or more of them as he or she may see fit.
Notwithstanding the foregoing, (i) if any matter is submitted to the
stockholders which does not affect the interests of all series, then only
stockholders of the affected series shall be entitled to vote and (ii) in
the event the Investment Company Act of 1940, as amended, or the rules and
regulations promulgated thereunder shall require a greater or different
vote than would otherwise be required herein or by the Articles of
Incorporation of the corporation, such greater or different voting
requirement shall also be satisfied.
3. (a) The corporation shall redeem any of its shares for which it has
received payment in full that may be presented to the corporation on
any date after the issue date of any such shares at the net asset
value thereof, such redemption and the valuation and payment in
connection therewith to be made in compliance with the provisions of
the Investment Company Act of 1940 and the Rules and Regulations
promulgated thereunder and with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., as from time to time
amended.
(b) From and after the close of business on the day when the shares are
properly tendered for repurchase the owner shall, with respect of said
shares, cease to be a stockholder of the corporation and shall have
only the right to receive the repurchase price in accordance with the
provisions hereof. The shares so repurchased may, as the Board of
Directors determines, be held in the treasury of the Corporation and
may be resold, or, if the laws of Kansas shall permit, may be retired.
Repurchase of shares is conditional upon the corporation having funds
or property legally available therefor.
4. All shares of the corporation, upon issuance and sale, shall be fully paid,
nonassessable and redeemable. Within the respective series of the
corporation, all shares have equal voting, participation and liquidation
rights, but have no subscription or preemptive rights.
5. (a) Outstanding shares of Corporate Bond Series A and B shall represent a
stockholder interest in a particular fund of assets held by the
corporation which fund shall be invested and reinvested in accordance
with policies and objectives established by the Board of Directors.
Outstanding shares of U.S. Government Series A and B shall represent a
stockholder interest in a particular fund of assets held by the
corporation which fund shall be invested and reinvested in accordance
with policies and objectives established by the Board of Directors.
Outstanding shares of Limited Maturity Bond Series A and B shall
represent a stockholder interest in a particular fund of assets held
by the corporation which fund shall be invested and reinvested in
accordance with policies and objectives established by the Board of
Directors. Outstanding shares of Global Aggressive Bond Series A and B
shall represent a stockholder interest in a particular fund of assets
held by the corporation which fund shall be invested and reinvested in
accordance with policies and objectives established by the Board of
Directors. Outstanding shares of High Yield Series A and B shall
represent a stockholder interest in a particular fund of assets held
by the corporation which fund shall be invested and reinvested in
accordance with policies and objectives established by the Board of
Directors. Outstanding shares of Emerging Markets Total Return Series
A and B shall represent a stockholder interest in a particular fund of
assets held by the corporation which fund shall be invested and
reinvested in accordance with policies and objectives established by
the Board of Directors. Outstanding
<PAGE>
shares of Global Asset Allocation Series A and B shall represent a
stockholder interest in a particular fund of assets held by the
corporation which fund shall be invested and reinvested in accordance
with policies and objectives established by the Board of Directors.
(b) All cash and other property received by the corporation from the sale
of shares of Corporate Bond Series A and B, U.S. Government Series A
and B, Limited Maturity Bond Series A and B, Global Aggressive Bond
Series A and B, High Yield Series A and B, Emerging Markets Total
Return Series A and B, and Global Asset Allocation Series A and B,
respectively, all securities and other property held as a result of
the investment and reinvestment of such cash and other property, all
revenues and income received or receivable with respect to such cash,
other property, investments and reinvestments, and all proceeds
derived from the sale, exchange, liquidation or other disposition of
any of the foregoing, shall be allocated to the Corporate Bond Series
A and B, U.S. Government Series A and B, Limited Maturity Bond Series
A and B, Global Aggressive Bond Series A and B, High Yield Series A
and B, Emerging Markets Total Return Series A and B, or Global Asset
Allocation Series A and B, to which they relate and held for the
benefit of the stockholders owning shares of such series.
(c) All losses, liabilities and expenses of the corporation (including
accrued liabilities and expenses and such reserves as the Board of
Directors may determine are appropriate) shall be allocated and
charged to the series to which such loss, liability or expense
relates. Where any loss, liability or expense relates to more than one
series, the Board of Directors shall allocate the same between or
among such series pro rata based on the respective net asset values of
such series or on such other basis as the Board of Directors deems
appropriate.
(d) All allocations made hereunder by the Board of Directors shall be
conclusive and binding upon all stockholders and upon the corporation.
6. Each share of stock of a series shall have the same preferences, rights,
privileges and restrictions as each other share of stock of that series.
Each fractional share of stock of a series proportionately shall have the
same preferences, rights, privileges and restrictions as a whole share.
7. Dividends may be paid when, as and if declared by the Board of Directors
out of funds legally available therefor. Shares of Corporate Bond Series A
and B represent a stockholder interest in a particular fund of assets and,
accordingly, dividends shall be calculated and declared for these series in
the same manner, at the same time, on the same day, and will be paid at the
same dividend rate except that expenses attributable to Corporate Bond
Series A or B and payments made pursuant to a 12b-1 Plan or Shareholder
Services Plan shall be borne exclusively by the affected Corporate Bond
Series. Stockholders of the Corporate Bond Series shall share in dividends
declared and paid with respect to such series pro rata based on their
ownership of shares of such series. Shares of U.S. Government Series A and
B represent a stockholder interest in a particular fund of assets held by
the corporation and, accordingly, dividends shall be calculated and
declared for these series in the same manner, at the same time, on the same
day, and shall be paid at the same dividend rate, except that expenses
attributable to a particular series and payments made pursuant to a 12b-1
Plan or Shareholder Services Plan shall be borne exclusively by the
affected U.S. Government Series. Stockholders of the U.S. Government Series
shall share in dividends declared and paid with respect to such series pro
rata based on their ownership of shares of such series. Shares of Limited
Maturity Bond Series A and B represent a stockholder interest in a
particular fund of assets and, accordingly, dividends shall be calculated
and declared for these series in the same manner, at the same time, on the
same day, and will be paid at the same dividend rate except that expenses
attributable to Limited Maturity Bond Series A or B and payments made
pursuant to a 12b-1 Plan or Shareholder Services Plan shall be borne
exclusively by the affected Limited Maturity Bond Series. Stockholders of
the
<PAGE>
Limited Maturity Bond Series shall share in dividends declared and paid
with respect to such series pro rata based on their ownership of shares of
such series. Shares of Global Aggressive Bond Series A and B represent a
stockholder interest in a particular fund of assets and, accordingly,
dividends shall be calculated and declared for these series in the same
manner, at the same time, on the same day, and will be paid at the same
dividend rate except that expenses attributable to Global Aggressive Bond
Series A or B and payments made pursuant to a 12b-1 Plan or Shareholder
Services Plan shall be borne exclusively by the affected Global Aggressive
Bond Series. Stockholders of the Global Aggressive Bond Series A and B
shall share in dividends declared and paid with respect to such series pro
rata based on their ownership of shares of such series. Shares of High
Yield Series A and B represent a stockholder interest in a particular fund
of assets and, accordingly, dividends shall be calculated and declared for
these series in the same manner, at the same time, on the same day, and
will be paid at the same dividend rate except that expenses attributable to
High Yield Series A or B and payments made pursuant to a 12b-1 Plan or
Shareholder Services Plan shall be borne exclusively by the affected High
Yield Series. Stockholders of the High Yield Series shall share in
dividends declared and paid with respect to such series pro rata based on
their ownership of shares of such series. Shares of Emerging Markets Total
Return Series A and B represent a stockholder interest in a particular fund
of assets and, accordingly, dividends shall be calculated and declared for
these series in the same manner, at the same time, on the same day, and
will be paid at the same dividend rate except that expenses attributable to
Emerging Markets Total Return Series A or B and payments made pursuant to a
12b-1 Plan or Shareholder Services Plan shall be borne exclusively by the
affected Emerging Markets Total Return Series. Stockholders of the Emerging
Markets Total Return Series shall share in dividends declared and paid with
respect to such series pro rata based on their ownership of shares of such
series. Shares of Global Asset Allocation Series A and B represent a
stockholder interest in a particular fund of assets and, accordingly,
dividends shall be calculated and declared for these series in the same
manner, at the same time, on the same day, and will be paid at the same
dividend rate except that expenses attributable to Global Asset Allocation
Series A or B and payments made pursuant to a 12b-1 Plan or Shareholder
Services Plan shall be borne exclusively by the affected Global Asset
Allocation Series. Stockholders of the Global Asset Allocation Series shall
share in dividends declared and paid with respect to such series pro rata
based on their ownership of shares of such series. Whenever dividends are
declared and paid with respect to the Corporate Bond Series A and B, U.S.
Government Series A and B, Limited Maturity Bond Series A and B, Global
Aggressive Bond Series A and B, High Yield Series A and B, Emerging Markets
Total Return Series A and B, or Global Asset Allocation Series A and B, the
holders of shares of the other series shall have no rights in or to such
dividends.
8. In the event of liquidation, stockholders of each series shall be entitled
to share in the assets of the corporation that are allocated to such series
and that are available for distribution to the stockholders of such series.
Liquidating distributions shall be made to the stockholders of each series
pro rata based on their share ownership of such series.
9. On the eighth anniversary of the purchase of shares of the Corporate Bond
Series B, U.S. Government Series B, Limited Maturity Bond Series B, Global
Aggressive Bond Series B, High Yield Series B, Emerging Markets Total
Return Series B, or Global Asset Allocation Series B, (except those
purchased through the reinvestment of dividends and other distributions),
such shares will automatically convert to shares of Corporate Bond Series
A, U.S. Government Series A, Limited Maturity Bond Series A, Global
Aggressive Bond Series A, High Yield Series A, Emerging Markets Total
Return Series A, or Global Asset Allocation Series A, respectively, at the
relative net asset values of each of the series without the imposition of
any sales load, fee or other charge. All shares in a stockholder's account
that were purchased through the reinvestment of dividends and other
distributions paid with respect to Series B shares will be considered to be
held in a separate
<PAGE>
sub-account. Each time Series B shares are converted to Series A shares, a
pro rata portion of the Series B shares held in the sub-account will also
convert to Series A shares.
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolutions to become effective.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 12th day of March, 1997.
John D. Cleland
------------------------------------------
John D. Cleland, President
Amy J. Lee
------------------------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, L. Charmaine Lucas, a Notary Public in and for
the County and State aforesaid, came JOHN D. CLELAND, President, and AMY J. LEE,
Secretary, of the Security Income Fund, a Kansas corporation, personally known
to me to be the persons who executed the foregoing instrument of writing as
President and Secretary, respectively, and duly acknowledged the execution of
the same this 12th day of March, 1997.
L. Charmaine Lucas
------------------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires April 1, 1998
<PAGE>
CERTIFICATE CHANGING NAME OF
SERIES OF STOCK
OF
SECURITY INCOME FUND
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
We, John D. Cleland, President, and Amy J. Lee, Secretary of Security Income
Fund, a corporation organized and existing under the laws of the State of
Kansas, and whose registered office is Security Benefit Life Building, 700
Harrison Street, Topeka, Shawnee County, Kansas, do hereby certify that pursuant
to authority expressly vested in the Board of Directors by the provisions of the
corporation's Articles of Incorporation, the Board of Directors of said
corporation at a meeting duly convened and held on the 7th day of February,
1997, adopted resolutions changing the name of Global Aggressive Bond Series A
and Global Aggressive Bond Series B, existing series of common stock of Security
Income Fund, which resolutions are provided in their entirety as follows:
WHEREAS, the Board of Directors has approved the change in name of an existing
series of common stock, from Global Aggressive Bond Series A and B to Global
High Yield Series A and B to more accurately reflect the investment objectives
of the series.
WHEREAS, there are no changes in the voting powers, designations, preferences
and relative, participating, optional or other rights, if any, or the
qualifications, limitations or restrictions of the series requiring stockholder
approval;
NOW, THEREFORE, BE IT RESOLVED, that, the name of Global Aggressive Bond Series
A and Global Aggressive Bond Series B of Security Income Fund is hereby changed
to Global High Yield Series A and Global High Yield Series B, respectively;
FURTHER RESOLVED, that, the appropriate officers of the corporation be, and they
hereby are, authorized and directed to take such action as may be necessary
under the laws of the State of Kansas or as they deem appropriate to cause the
foregoing resolutions to become effective.
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the seal of the
corporation this 12th day of March, 1997.
John D. Cleland
------------------------------------------
John D. Cleland, President
Amy J. Lee
------------------------------------------
Amy J. Lee, Secretary
STATE OF KANSAS )
) ss.
COUNTY OF SHAWNEE)
Be it remembered, that before me, L. Charmaine Lucas, a Notary Public in and for
the County and State aforesaid, came JOHN D. CLELAND, President, and AMY J. LEE,
Secretary, of the Security Income Fund, a Kansas corporation, personally known
to me to be the persons who executed the foregoing instrument of writing as
President and Secretary, respectively, and duly acknowledged the execution of
the same this 12th day of March, 1997.
L. Charmaine Lucas
------------------------------------------
Notary Public
(NOTARIAL SEAL)
My commission expires April 1, 1998
<PAGE>
No. SHARES _______________
SECURITY INCOME FUND
CORPORATE BOND SERIES
INCORPORATED UNDER THE LAWS OF THE STATE OF KANSAS
Total Authorized Shares:
1,000,000,000 Shares of Capital Stock of Security Income Fund
with a Par Value of $1.00 Each
THIS CERTIFIES THAT
is the owner of
fully paid and non-assessable shares of Common Stock, each of the par value of
$1.00 per share, of SECURITY INCOME FUND, transferable on the books of the
corporation by the holder hereof in person or by attorney, upon surrender of
this certificate duly endorsed or assigned.
This certificate and the shares represented hereby are subject to the laws of
the State of Kansas and to the Articles of Incorporation and the Bylaws of the
corporation as from time to time amended.
IN WITNESS WHEREOF, SECURITY INCOME FUND, has caused this certificate to be
signed by its duly authorized officers and to be sealed with the seal of the
corporation.
Dated Account No.
- ----------------------------------- -----------------------------------
SECRETARY-ASSISTANT SECRETARY PRESIDENT-VICE PRESIDENT
(SEAL)
<PAGE>
No. SHARES _______________
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES
INCORPORATED UNDER THE LAWS OF THE STATE OF KANSAS
Total Authorized Shares:
1,000,000,000 Shares of Capital Stock of Security Income Fund
with a Par Value of $1.00 Each
THIS CERTIFIES THAT
is the owner of
fully paid and non-assessable shares of Common Stock, each of the par value of
$1.00 per share, of SECURITY INCOME FUND, transferable on the books of the
corporation by the holder hereof in person or by attorney, upon surrender of
this certificate duly endorsed or assigned.
This certificate and the shares represented hereby are subject to the laws of
the State of Kansas and to the Articles of Incorporation and the Bylaws of the
corporation as from time to time amended.
IN WITNESS WHEREOF, SECURITY INCOME FUND, has caused this certificate to be
signed by its duly authorized officers and to be sealed with the seal of the
corporation.
Dated Account No.
- ----------------------------------- -----------------------------------
SECRETARY-ASSISTANT SECRETARY PRESIDENT-VICE PRESIDENT
(SEAL)
<PAGE>
No. SHARES _______________
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES
INCORPORATED UNDER THE LAWS OF THE STATE OF KANSAS
Total Authorized Shares:
1,000,000,000 Shares of Capital Stock of Security Income Fund
with a Par Value of $1.00 Each
THIS CERTIFIES THAT
is the owner of
fully paid and non-assessable shares of Common Stock, each of the par value of
$1.00 per share, of SECURITY INCOME FUND, transferable on the books of the
corporation by the holder hereof in person or by attorney, upon surrender of
this certificate duly endorsed or assigned.
This certificate and the shares represented hereby are subject to the laws of
the State of Kansas and to the Articles of Incorporation and the Bylaws of the
corporation as from time to time amended.
IN WITNESS WHEREOF, SECURITY INCOME FUND, has caused this certificate to be
signed by its duly authorized officers and to be sealed with the seal of the
corporation.
Dated Account No.
- ----------------------------------- -----------------------------------
SECRETARY-ASSISTANT SECRETARY PRESIDENT-VICE PRESIDENT
(SEAL)
<PAGE>
No. SHARES _______________
SECURITY INCOME FUND
GLOBAL AGGRESSIVE BOND SERIES
INCORPORATED UNDER THE LAWS OF THE STATE OF KANSAS
Total Authorized Shares:
1,000,000,000 Shares of Capital Stock of Security Income Fund
with a Par Value of $1.00 Each
THIS CERTIFIES THAT
is the owner of
fully paid and non-assessable shares of Common Stock, each of the par value of
$1.00 per share, of SECURITY INCOME FUND, transferable on the books of the
corporation by the holder hereof in person or by attorney, upon surrender of
this certificate duly endorsed or assigned.
This certificate and the shares represented hereby are subject to the laws of
the State of Kansas and to the Articles of Incorporation and the Bylaws of the
corporation as from time to time amended.
IN WITNESS WHEREOF, SECURITY INCOME FUND, has caused this certificate to be
signed by its duly authorized officers and to be sealed with the seal of the
corporation.
Dated Account No.
- ----------------------------------- -----------------------------------
SECRETARY-ASSISTANT SECRETARY PRESIDENT-VICE PRESIDENT
(SEAL)
<PAGE>
No. SHARES _______________
SECURITY INCOME FUND
INCORPORATED UNDER THE LAWS OF THE STATE OF KANSAS
The company is authorized to issue an unlimited number of shares.
GLOBAL ASSET ALLOCATION SERIES
THIS CERTIFIES THAT
is the owner of
fully paid and non-assessable shares of Common Stock, each of the par value of
$1.00, of SECURITY INCOME FUND, transferable on the books of the corporation by
the holder hereof in person or by attorney, upon surrender of this certificate
duly endorsed or assigned.
This certificate and the shares represented hereby are subject to the laws of
the State of Kansas and to the Articles of Incorporation and the Bylaws of the
corporation as from time to time amended.
IN WITNESS WHEREOF, SECURITY INCOME FUND, has caused this certificate to be
signed by its duly authorized officers and to be sealed with the seal of the
corporation.
Dated Account No.
- ----------------------------------- -----------------------------------
SECRETARY-ASSISTANT SECRETARY PRESIDENT-VICE PRESIDENT
(SEAL)
<PAGE>
No. SHARES _______________
SECURITY INCOME FUND
INCORPORATED UNDER THE LAWS OF THE STATE OF KANSAS
The company is authorized to issue an unlimited number of shares.
EMERGING MARKETS TOTAL RETURN SERIES
THIS CERTIFIES THAT
is the owner of
fully paid and non-assessable shares of Common Stock, each of the par value of
$1.00, of SECURITY INCOME FUND, transferable on the books of the corporation by
the holder hereof in person or by attorney, upon surrender of this certificate
duly endorsed or assigned.
This certificate and the shares represented hereby are subject to the laws of
the State of Kansas and to the Articles of Incorporation and the Bylaws of the
corporation as from time to time amended.
IN WITNESS WHEREOF, SECURITY INCOME FUND, has caused this certificate to be
signed by its duly authorized officers and to be sealed with the seal of the
corporation.
Dated Account No.
- ----------------------------------- -----------------------------------
SECRETARY-ASSISTANT SECRETARY PRESIDENT-VICE PRESIDENT
(SEAL)
<PAGE>
No. SHARES _______________
SECURITY INCOME FUND
INCORPORATED UNDER THE LAWS OF THE STATE OF KANSAS
The company is authorized to issue an unlimited number of shares.
GLOBAL HIGH YIELD SERIES
THIS CERTIFIES THAT
is the owner of
fully paid and non-assessable shares of Common Stock, each of the par value of
$1.00, of SECURITY INCOME FUND, transferable on the books of the corporation by
the holder hereof in person or by attorney, upon surrender of this certificate
duly endorsed or assigned.
This certificate and the shares represented hereby are subject to the laws of
the State of Kansas and to the Articles of Incorporation and the Bylaws of the
corporation as from time to time amended.
IN WITNESS WHEREOF, SECURITY INCOME FUND, has caused this certificate to be
signed by its duly authorized officers and to be sealed with the seal of the
corporation.
Dated Account No.
- ----------------------------------- -----------------------------------
SECRETARY-ASSISTANT SECRETARY PRESIDENT-VICE PRESIDENT
(SEAL)
<PAGE>
No. SHARES _______________
SECURITY INCOME FUNDS
INCORPORATED UNDER THE LAWS OF THE STATE OF KANSAS
The company is authorized to issue an unlimited number of shares.
HIGH YIELD SERIES
THIS CERTIFIES THAT
is the owner of
fully paid and non-assessable shares of Common Stock, each of the par value of
$1.00, of SECURITY INCOME FUNDS, transferable on the books of the corporation by
the holder hereof in person or by attorney, upon surrender of this certificate
duly endorsed or assigned.
This certificate and the shares represented hereby are subject to the laws of
the State of Kansas and to the Articles of Incorporation and the Bylaws of the
corporation as from time to time amended.
IN WITNESS WHEREOF, SECURITY INCOME FUNDS, has caused this certificate to be
signed by its duly authorized officers and to be sealed with the seal of the
corporation.
Dated Account No.
- ----------------------------------- -----------------------------------
SECRETARY-ASSISTANT SECRETARY PRESIDENT-VICE PRESIDENT
(SEAL)
<PAGE>
INVESTMENT ADVISORY CONTRACT
THIS AGREEMENT, made this 28th day of April, 1997, between SECURITY INCOME FUND,
a Kansas corporation (the "Fund"), and MFR Advisors, Inc., a New York
corporation (the "Adviser"),
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end management investment
company registered under the Federal Investment Company Act of 1940; and
WHEREAS, the Fund is authorized to issue shares in separate Series, with each
such Series representing interests in a separate portfolio of securities and
other assets; and
WHEREAS, the Fund desires to retain the Adviser to render certain investment
advisory services hereunder and with respect to Emerging Markets Total Return
Series, Global Asset Allocation Series, and Global High Yield Series (formerly
Global Aggressive Bond Series) of the Fund (the "Series") on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties hereto agree as follows:
1. EMPLOYMENT OF ADVISER. The Fund hereby employs the Adviser to act as
investment adviser to the Series of the Fund with respect to the investment
of its assets, and to supervise and arrange the purchase of securities for
and the sale of securities held in the portfolios of the Series of the Fund,
subject always to the supervision of the Board of Directors of the Fund,
during the period and upon and subject to the terms and conditions herein
set forth. The Adviser hereby accepts such employment and agrees to perform
the services required by this Agreement for the compensation herein
provided.
In the event the Fund establishes additional series with respect to which it
desires to retain the Adviser to render investment advisory services
hereunder, it shall notify the Adviser in writing. If the Adviser is willing
to render such services it shall notify the Fund in writing, whereupon such
series shall become a Series subject to the terms and conditions hereunder,
and to such amended or additional provisions as shall be specifically agreed
to by the Fund and the Adviser in accordance with applicable law.
2. INVESTMENT ADVISORY DUTIES. The Adviser shall regularly provide each Series
of the Fund with investment research, advice and supervision, continuously
furnish an investment program and recommend what securities shall be
purchased and sold and what portion of the assets of each series shall be
held uninvested and shall arrange for the purchase of securities and other
investments for and the sale of securities and other investments held in the
portfolio of each Series. All investment advice furnished by the Adviser to
each Series under this Section 2 shall at all times conform to any
requirements imposed by the
<PAGE>
provisions of the Fund's Articles of Incorporation and Bylaws, the
Investment Company Act of 1940 and the rules and regulations promulgated
thereunder, any other applicable provisions of law, and the terms of the
registration statements of the Fund under the Securities Act of 1933 and the
Investment Company Act of 1940, all as from time to time amended. The
Adviser shall advise and assist the officers or other agents of the Fund in
taking such steps as are necessary or appropriate to carry out the decisions
of the Fund's Board of Directors (and any duly appointed committee thereof)
with regard to the foregoing matters and the general conduct of the Fund's
business.
<PAGE>
3. PORTFOLIO TRANSACTIONS AND BROKERAGE.
(a) Transactions in portfolio securities shall be effected by the Adviser,
through brokers or otherwise, in the manner permitted in this Section 3
and in such manner as the Adviser shall deem to be in the best
interests of the Fund after consideration is given to all relevant
factors.
(b) In reaching a judgment relative to the qualification of a broker to
obtain the best execution of a particular transaction, the Adviser may
take into account all relevant factors and circumstances, including the
size of any contemporaneous market in such securities; the importance
to the Fund of speed and efficiency of execution; whether the
particular transaction is part of a larger intended change in portfolio
position in the same securities; the execution capabilities required by
the circumstances of the particular transaction; the capital required
by the transaction; the overall capital strength of the broker; the
broker's apparent knowledge of or familiarity with sources from or to
whom such securities may be purchased or sold; as well as the
efficiency, reliability and confidentiality with which the broker has
handled the execution of prior similar transactions.
(c) Subject to any statements concerning the allocation of brokerage
contained in the Fund's prospectus or statement of additional
information, the Adviser is authorized to direct the execution of
portfolio transactions for the Fund to brokers who furnish investment
information or research service to the Adviser. Such allocation shall
be in such amounts and proportions as the Adviser may determine. If the
transaction is directed to a broker providing brokerage and research
services to the Adviser, the commission paid for such transaction may
be in excess of the commission another broker would have charged for
effecting that transaction, if the Adviser shall have determined in
good faith that the commission is reasonable in relation to the value
of the brokerage and research services provided, viewed in terms of
either that particular transaction or the overall responsibilities of
the Adviser with respect to all accounts as to which it now or
hereafter exercises investment discretion. For purposes of the
immediately preceding sentence, "providing brokerage and research
services" shall have the meaning generally given such terms or similar
terms under Section 28(e)(3) of the Securities Exchange Act of 1934, as
amended.
<PAGE>
(d) In the selection of a broker for the execution of any transaction not
subject to fixed commission rates, the Adviser shall have no duty or
obligation to seek advance competitive bidding for the most favorable
negotiated commission rate to the applicable to such transaction, or to
select any broker solely on the basis of its purported or "posted"
commission rates.
(e) In connection with transactions on markets other than national or
regional securities exchanges, the Fund will deal directly with the
selling principal or market maker without incurring charges for the
services of a broker on its behalf unless, in the best judgment of the
Adviser, better price or execution can be obtained in utilizing the
services of a broker.
4. ALLOCATION OF EXPENSES AND CHARGES. The Adviser shall provide investment
advisory, statistical and research facilities and all clerical services
relating to research, statistical and investment work, and shall provide for
the compilation and maintenance of such records relating to these functions
as shall be required under applicable law and the rules and regulations of
the Securities and Exchange Commission.
Other than as specifically indicated in the preceding sentences, the Adviser
shall not be required to pay any expenses of the Fund, and in particular,
but without limiting the generality of the foregoing, the Adviser shall not
be required to pay office rental or general administrative expenses; Board
of Directors' fees; legal, auditing and accounting expenses; insurance
premiums; broker's commissions; taxes and governmental fees and any
membership dues; fees of custodian, transfer agent, registrar and dividend
disbursing agent (if any); expenses of obtaining quotations on the Fund's
portfolio securities and pricing of the Fund's shares; cost of stock
certificates and any other expenses (including clerical expenses) of issue,
sale, repurchase or redemption of shares of the Fund's capital stock; costs
and expenses in connection with the registration of the Fund's capital stock
under the Securities Act of 1933 and qualification of the Fund's capital
stock under the Blue Sky laws of the states where such stock is offered;
costs and expenses in connection with the registration of the Fund under the
Investment Company Act of 1940 and all periodic and other reports required
thereunder; expenses of preparing, printing and distributing reports, proxy
statements, prospectuses, statements of additional information, notices and
distributions to stockholders; costs of stationery; costs of stockholder and
other meetings; expenses of maintaining the Fund's corporate existence; and
such nonrecurring expenses as may arise including litigation affecting the
Fund and the legal obligations the Fund may have to indemnify its officers
and directors.
5. COMPENSATION OF ADVISER.
(a) As compensation for the services rendered by the Adviser as provided
herein, for each of the Fund's fiscal years this Agreement is in
effect, the Fund shall pay the Adviser an annual fee equal to 1.00
percent of the average daily closing value of the net assets for each
of Emerging Markets Total Return Series and Global Asset Allocation
Series, and .75 percent of the average daily closing value of the net
<PAGE>
assets of Global High Yield Series, computed on a daily basis. Such fee
shall be adjusted and payable monthly. If this Agreement shall be
effective for only a portion of a year in which a fee is owed for any
Series, then the Adviser's compensation for said year shall be prorated
for such portion. For purposes of this Section 5, the value of the net
assets of the Series shall be computed in the same manner as the value
of such net assets is computed in connection with the determination of
the net asset value of the shares of the Fund as described in the
Fund's Prospectus and Statement of Additional Information.
(b) For each of the Fund's full fiscal years this Agreement remains in
force, the Adviser agrees that if the total annual expenses of each
Series of the Fund, exclusive of interest and taxes and extraordinary
expenses (such as litigation), but inclusive of the Adviser's
compensation, exceed any expense limitation imposed by state securities
law or regulation in any state in which shares of the Fund are then
qualified for sale, as such regulations may be amended from time to
time, the Adviser will contribute to such Series such funds or waive
such portion of its fee, adjusted monthly as may be requisite to insure
that such annual expenses will not exceed any such limitation. If this
Contract shall be effective for only a portion of one of the Series'
fiscal years, then the maximum annual expenses shall be prorated for
such portion. Brokerage fees and commissions incurred in connection
with the purchase or sale of any securities by a Series shall not be
deemed to be expenses with the meaning of this paragraph (b).
6. ADVISER NOT TO RECEIVE COMMISSIONS. In connection with the purchase or sale
of portfolio securities for the account of the Fund, neither the Adviser nor
any officer or director of the Adviser shall act as principal or receive any
compensation from the Fund other than its compensation as provided for in
Section 5 above. If the Adviser, or any "affiliated person" (as defined in
the Investment Company Act of 1940) receives any cash, credits, commissions
or tender fees from any person in connection with transactions in the Fund's
portfolio securities (including but not limited to the tender or delivery of
any securities held in the Fund's portfolio), the Adviser shall immediately
pay such amount to the Fund in cash or as a credit against any then earned
but unpaid management fees due by the Fund to the Adviser.
7. LIMITATION OF LIABILITY OF ADVISER. So long as the Adviser shall give the
Fund the benefit of its best judgment and effort in rendering services
hereunder, the Adviser shall not be liable for any errors of judgment or
mistake of law, or for any loss sustained by reason of the adoption of any
investment policy or the purchase, sale or retention of any security on its
recommendation, whether or not such recommendation shall have been based
upon its own investigation and research or upon investigation and research
made by any other individual, firm or corporation, if such recommendation
shall have been made and such other individual, firm or corporation shall
have been selected with due care and in good faith. Nothing herein contained
shall, however, be construed to protect the Adviser against any liability to
the Fund or its security holders by reason of willful misfeasance, bad faith
or gross negligence in the performance of its duties or by reason of
<PAGE>
its reckless disregard of its obligations and duties under this Agreement.
As used in this Section 7, "Adviser" shall include directors, officers and
employees of the Adviser, as well as that corporation itself.
8. OTHER ACTIVITIES NOT RESTRICTED. Nothing in this Agreement shall prevent the
Adviser or any officer thereof from acting as investment adviser for any
other person, firm, or corporation, nor shall it in any way limit or
restrict the Adviser or any of its directors, officers, stockholders or
employees from buying, selling, or trading any securities for its own
accounts or for the accounts of others for whom it may be acting; provided,
however, that the Adviser expressly represents that it will undertake no
activities which, in its judgment, will conflict with the performance of its
obligations to the Fund under this Agreement. The Fund acknowledges that the
Adviser acts as investment adviser to other investment companies, and it
expressly consents to the Adviser acting as such; provided, however, that if
in the opinion of the Adviser, particular securities are consistent with the
investment objectives of, and are desirable purchases or sales for the
portfolios of one or more Series and one or more of such other investment
companies or series of such companies at approximately the same time, such
purchases or sales will be made on a proportionate basis if feasible, and if
not feasible, then on a rotating or other equitable basis.
9. DURATION AND TERMINATION OF AGREEMENT. This Agreement shall become effective
on May 1, 1997, provided that on that date it is approved by the holders of
a majority of the outstanding voting securities of each Series of the Fund.
This Agreement shall continue in force until May 1, 1998, and for successive
12-month periods thereafter, unless terminated, provided each such
continuance is specifically approved at least annually by (a) the vote of a
majority of the entire Board of Directors of the Fund, and the vote of a
majority of the directors of the Fund who are not parties to this Agreement
or interested persons (as such terms are defined in the Investment Company
Act of 1940) of any such party cast in person at a meeting of such directors
called for the purpose of voting upon such approval, or (b) by the vote of
the holders of a majority of the outstanding voting securities of each
series of the Fund (as defined in the Investment Company Act of 1940). In
the event a majority of the outstanding shares of one series vote for
continuance of the Advisory Contract, it will be continued for that series
even though the Advisory Contract is not approved by a majority of the
outstanding shares of any other series. Upon this Agreement becoming
effective, any previous agreement between the Fund and the Adviser providing
for investment advisory and management services shall concurrently
terminate, except that such termination shall not affect fees accrued and
guarantees of expenses with respect to any period prior to termination.
This Agreement may be terminated at any time as to any series of the Fund,
without payment of any penalty, by vote of the Board of Directors of the
Fund or by vote of the holders of a majority of the outstanding voting
securities of that series of the Fund, or by the Adviser, upon 60 days'
written notice to the other party.
<PAGE>
This Agreement shall automatically terminate in the event of its
"assignment" (as defined in the Investment Company Act of 1940).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective corporate officers thereto duly authorized on the
day, month and year first above written.
SECURITY INCOME FUND
By: JOHN D. CLELAND
--------------------------------
President
ATTEST:
AMY J. LEE
- -------------------------------------
Secretary
MFR ADVISORS, INC.
By: MARIA F. RAMIREZ
--------------------------------
President
ATTEST:
BRUCE JENSEN
- -------------------------------------
Secretary
<PAGE>
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made as of this 28th day of April, 1997, by and between MFR
ADVISORS, INC., a New York corporation (The "Adviser"), and LEXINGTON MANAGEMENT
CORPORATION, a Delaware corporation (the "Sub-Adviser"),
WITNESSETH:
WHEREAS, the Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended, and engages in the business of acting as an
investment adviser;
WHEREAS, the Adviser is the investment adviser for certain series of the
Security Income Fund (the "Fund"), and provides investment advisory services to
the Fund on the terms and conditions set forth in an investment advisory
contract;
WHEREAS, the Fund is registered as a diversified, open-end management investment
company under the Investment Company Act of 1940, as amended, (the "1940 Act"),
and the rules and regulations promulgated thereunder;
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets; and
WHEREAS, the Adviser desires to retain the Sub-Adviser as the Adviser's agent to
furnish certain advisory services to the Emerging Markets Total Return Series,
the Global Asset Allocation Series, and the Global High Yield Series of the Fund
(the "Series"), on the terms and conditions hereinafter set forth.
<PAGE>
NOW THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. APPOINTMENT. The Adviser hereby appoints Sub-Adviser to provide certain
sub-investment advisory services to the Series for the period and on the
terms set forth in this Agreement. Sub-Adviser accepts such appointment and
agrees to furnish the services herein set forth for the compensation herein
provided.
2. INVESTMENT ADVICE. The Sub-Adviser shall furnish the Series with investment
research and advice. In addition, the Sub-Adviser may avail itself of any
investment research or advice provided by the Adviser. The Sub-Adviser
shall give the Series the benefit of its best judgment, efforts and
facilities in rendering its services as Sub-Adviser.
3. INVESTMENT ANALYSIS AND IMPLEMENTATION. In carrying out its obligation
under paragraph 2 hereof, the Sub-Adviser shall provide the following
services with respect to the Global High Yield Series:
(a) consult with Adviser concerning which issuers and securities should be
represented in the Global High Yield Series' portfolio and regularly
report thereon to the Fund's Board of Directors and the Adviser;
(b) formulate and implement continuing programs for the purchase and sale
of the securities of such issuers consistent with the investment
policies set forth in the Prospectus and Statement of Additional
Information of the Global High Yield Series, subject at all times to
the policies and control of the Fund's Board of Directors and the
supervision of the Adviser;
(c) continuously review the Global High Yield Series' security holdings
and the investment program and the investment policies of the Global
High Yield Series and regularly report thereon to the Fund's Board of
Directors and the Adviser; and
2
<PAGE>
(d) take, on behalf of the Global High Yield Series, all actions which
appear necessary to carry into effect such purchase and sale programs,
including the placement of orders for the purchase and sale of
securities for the Global High Yield Series.
In carrying out its obligations under paragraph 2 hereof, the Sub-Adviser shall
provide the following services with respect to the Emerging Markets Total Return
and Global Asset Allocation Series:
The Sub-Adviser will provide investment advice to the Adviser,
including recommendations on the purchase and sale of securities for
the Emerging Markets Total Return and Global Asset Allocation Series
and will make available to Adviser certain investment research of the
Sub-Adviser. The Adviser shall not be obligated to follow or accept
any recommendation made by the Sub-Adviser and the investment
management of the Emerging Markets Total Return and Global Asset
Allocation Series, including the making or disposition of any
investment, shall be the ultimate responsibility of Adviser.
4. BROKER-DEALER RELATIONSHIPS. The Adviser is responsible for decisions to
buy and sell securities for the Global High Yield Series, broker/dealer
selection, and negotiation of brokerage commission rates provided that the
Adviser has delegated this responsibility to the Sub-Adviser. The
Sub-Adviser's primary consideration in effecting a security transaction
will be execution at the most favorable price. In selecting a broker/dealer
to execute each particular transaction, the Sub-Adviser will take the
following into consideration: the best net price available; the
reliability, integrity and financial condition of the broker/dealer; the
size of and difficulty in executing the order; and the value of the
expected contribution of the broker/dealer to the investment performance of
the Global High Yield Series on a continuing basis. Accordingly, the price
to the Global High Yield Series in any transaction may be less favorable
than that available from another broker/dealer if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies as the Board of Directors may determine,
the Sub-Adviser shall not
3
<PAGE>
be deemed to have acted unlawfully or to have breached any duty created by
this Agreement or otherwise solely by reason of its having caused the
Global High Yield Series to pay a broker for effecting a portfolio
investment transaction in excess of the amount of commission another broker
or dealer would have charged for effecting that transaction if the
Sub-Adviser determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that
particular transaction or the Sub-Adviser's overall responsibilities with
respect to the Global High Yield Series and to its other clients as to
which it exercises investment discretion. The Sub-Adviser is further
authorized to place and/or to effect orders with such brokers and dealers
who may provide research or statistical material or other services to the
Global High Yield Series or to the Sub-Adviser. Such allocation shall be in
such amounts and proportions as the Sub-Adviser shall determine and the
Sub-Adviser will report on said allocations regularly to the Board of
Directors of the Fund and the Adviser indicating the brokers to whom such
allocations have been made and the basis therefor.
5. CONTROL BY BOARD OF DIRECTORS. Any investment program undertaken by the
Sub-Adviser pursuant to this Agreement, as well as any other activities
undertaken by the Sub-Adviser on behalf of the Series pursuant thereto,
shall at all times be subject to any directives of the Board of Directors
of the Fund.
6. COMPLIANCE WITH APPLICABLE REQUIREMENTS. In carrying out its obligations
under this Agreement, the Sub-Adviser shall ensure to the extent of the
Sub-Adviser's duties under this Agreement that the Global High Yield Series
complies with:
(a) all applicable provisions of the 1940 Act;
(b) the provisions of the Registration Statement of the Fund, as amended,
under the Securities Act of 1933 and the 1940 Act;
(c) all applicable statutes and regulations necessary to qualify the
Series as a Regulated Investment Company under Subchapter M of the
Internal Revenue Code (or any successor or similar provision), and
shall notify the Adviser immediately upon having a reasonable basis
for believing that the Series has ceased to so qualify or that it
might not so qualify in the future;
4
<PAGE>
(d) the provisions of the Fund's Articles of Incorporation, as amended;
(e) the provisions of the Bylaws of the Fund, as amended; and
(f) any other applicable provisions of state and federal law.
7. RECORDS. The Sub-Adviser hereby agrees to maintain all records relating to
its activities and obligations under this Agreement which are required to
be maintained by Rule 31a-1 under the 1940 Act and agrees to preserve such
records for the periods prescribed by Rule 31a-2 under the Act. The
Sub-Adviser further agrees that all such records are the property of the
Fund and agrees to surrender promptly to the Fund any such records upon the
Fund's request.
8. EXPENSES. The expenses connected with the Fund shall be borne by the
Sub-Adviser as follows:
(a) The Sub-Adviser shall maintain, at its expense and without cost to the
Adviser or the Series, a trading function in order to carry out its
obligations under subparagraph (d) of paragraph 3 hereof to place
orders for the purchase and sale of portfolio securities for the
Global High Yield Series.
(b) The Sub-Adviser shall pay any expenses associated with carrying out
its obligation under subparagraph (b) of paragraph 2 hereof to prepare
reports for the Fund's Board of Directors concerning issuers and
securities represented in the Global High Yield Series' portfolio and
the expenses of any travel by employees of the Sub-Adviser in
connection with such reports to the Fund's Board of Directors.
(c) The Sub-Adviser shall pay any expenses that it may incur in
communicating with the Adviser in connection with its obligations
under this Agreement, including the expenses of telephone calls,
special mail services and telecopier charges.
5
<PAGE>
9. DELEGATION OF RESPONSIBILITIES. Upon request of the Adviser and with the
approval of the Fund's Board of Directors, the Sub-Adviser may perform
services on behalf of the Fund which are not required by this Agreement.
Such services will be performed on behalf of the Fund, and the
Sub-Adviser's cost in rendering such services may be billed monthly to the
Adviser, subject to examination by the Adviser's independent accountants.
Payment or assumption by the Sub-Adviser of any Fund expense that the
Sub-Adviser is not required to pay or assume under this Agreement shall not
relieve the Adviser or the Sub-Adviser of any of their obligations to the
Fund or obligate the Sub-Adviser to pay or assume any similar Fund expense
on any subsequent occasions.
10. DELEGATION OF DUTIES. The Sub-Adviser may, at its discretion, delegate,
assign or subcontract any of the duties, responsibilities and services
governed by this agreement to a third party, whether or not by formal
written agreement, provided that such arrangement with a third party has
been approved by the Board of Directors of the Fund. The Sub-Adviser shall,
however, retain ultimate responsibility to the Fund and shall implement
such reasonable procedures as may be necessary for assuring that any
duties, responsibilities or services so assigned, subcontracted or
delegated are performed in conformity with the terms and conditions of this
agreement.
11. COMPENSATION. For the services to be rendered and the facilities furnished
hereunder, the Adviser shall pay the Sub-Adviser an annual fee equal to .20
percent of the average daily closing value of the net assets for each of
Emerging Markets Total Return Series, Global Asset Allocation Series, and
Global High Yield Series, computed on a daily basis. Such fee shall be
computed and payable monthly. If this Agreement shall be effective for only
a portion of a year, then the Sub-Adviser's compensation for said year
shall be prorated for such portion. For purposes of this paragraph 11, the
value of the net assets of the Series shall be computed in the same manner
at the end of the business day as the value of such net assets is computed
in connection with the determination of the net asset value of the Series'
shares as described in the Fund's prospectus and statement of additional
information. Payment of the Sub-Adviser's compensation for the preceding
month shall be made as promptly as possible after the end of each month.
6
<PAGE>
12. NON-EXCLUSIVITY. The services of the Sub-Adviser to the Adviser are not to
be deemed to be exclusive, and the Sub-Adviser shall be free to render
investment advisory or other services to others (including other investment
companies) and to engage in other activities, so long as its services under
this Agreement are not impaired thereby. The research provided by the
Sub-Adviser is for the benefit of the Series only.
13. TERM. This Agreement shall become effective at the close of business on the
date first shown above. It shall remain in force and effect, subject to
paragraph 14 hereof for one year from the date hereof.
14. RENEWAL. Following the expiration of its initial year term, this Agreement
shall continue in force and effect from year to year, provided that such
continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Directors or (ii) by the vote of a majority
of the Series' outstanding voting securities (as defined in Section
2(a)(42) of the 1940 Act), and
(b) by the affirmative vote of a majority of the directors who are not
parties to this Agreement or interested persons of a party to this
Agreement (other than as a director of the Fund), by votes cast in
person at a meeting specifically called for such purpose.
15. TERMINATION. This Agreement may be terminated at any time, without the
payment of any penalty, by vote of the Fund's Board of Directors or by vote
of a majority of the Series' outstanding voting securities (as defined in
Section 2(a)(42) of the 1940 Act), or by the Adviser or by the Sub-Adviser
on sixty (60) days' written notice to the other party. This Agreement shall
automatically terminate in the event of its "assignment" as that term is
defined in Section 2(a)(4) of the 1940 Act. This Agreement shall
automatically terminate in the event that the investment advisory contract
between the Adviser and the Fund is terminated, assigned or not renewed.
7
<PAGE>
16. LIABILITY OF THE SUB-ADVISER. In the absence of willful misfeasance, bad
faith or gross negligence on the part of the Sub-Adviser or its officers,
directors or employees, or reckless disregard by the Sub-Adviser of its
duties under this Agreement, the Sub-Adviser shall not be liable to the
Adviser, the Fund or to any shareholder of the Fund for any act or omission
in the course of, or connected with, rendering services hereunder or for
any losses that may be sustained in the purchase, holding or sale of any
security, provided the Sub-Adviser has acted in good faith.
17. INDEMNIFICATION. The Adviser and the Sub-Adviser each agree to indemnify
the other against any claim against, loss, or liability to, such other
party (including reasonable attorney's fees) arising out of any action on
the part of the indemnifying party which constitutes willful misfeasance,
bad faith or gross negligence.
18. NOTICES. Any notices under this Agreement shall be in writing, addressed
and delivered or mailed postage-paid to the other party at such address as
such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the
Sub-Adviser for this purpose shall be Park 80 West, Plaza Two, Saddle
Brook, New Jersey 07663, Attention: Lisa Curcio, Secretary, and the address
of the Adviser for this purpose shall be One Liberty Plaza, New York, New
York 10006.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the day and year first above
written.
ATTEST: MFR ADVISORS, INC.
PRISCILLA BRITNELL MARIA F. RAMIREZ
- ----------------------------------- By:--------------------------------
Title: Secretary
ATTEST: LEXINGTON MANAGEMENT
CORPORATION
RICHARD M. HISEY ROBERT M. DEMICHELE
- ----------------------------------- By:--------------------------------
Title: Chief Financial Officer
8
<PAGE>
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made this 28th day of April 1997, by and between MFR ADVISORS,
INC., a New York corporation (The "Adviser"), and SECURITY MANAGEMENT COMPANY,
LLC, a Kansas limited liability company (the "Sub-Adviser"),
WITNESSETH:
WHEREAS, the Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended, and engages in the business of acting as an
investment adviser;
WHEREAS, the Adviser is the investment adviser for certain series of the
Security Income Fund (the "Fund"), and provides investment advisory services to
the Fund on the terms and conditions set forth in an investment advisory
contract;
WHEREAS, the Fund is registered as a diversified, open-end management investment
company under the Investment Company Act of 1940, as amended, (the "1940 Act"),
and the rules and regulations promulgated thereunder;
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets; and
WHEREAS, the Adviser desires to retain the Sub-Adviser as the Adviser's agent to
furnish certain advisory services to the Global Asset Allocation Series of the
Fund (the "Series"), on the terms and conditions hereinafter set forth.
<PAGE>
NOW THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. APPOINTMENT. The Adviser hereby appoints Sub-Adviser to provide certain
sub-investment advisory services to the Series for the period and on the
terms set forth in this Agreement. Sub-Adviser accepts such appointment and
agrees to furnish the services herein set forth for the compensation herein
provided.
2. INVESTMENT ADVICE. The Sub-Adviser shall furnish the Series with investment
research and advice consistent with the investment policies set forth in
the Prospectus and Statement of Additional Information of the Fund, subject
at all times to the policies and control of the Fund's Board of Directors
and the supervision of the Adviser. In addition, the Sub-Adviser may avail
itself of any investment research or advice provided by the Adviser. The
Sub-Adviser shall give the Series the benefit of its best judgment, efforts
and facilities in rendering its services as Sub-Adviser.
3. INVESTMENT ANALYSIS AND IMPLEMENTATION. In carrying out its obligation
under paragraph 2 hereof, the Sub-Adviser shall:
(a) determine which domestic equity securities shall be represented in the
Series' portfolio and regularly report thereon to the Fund's Board of
Directors and the Adviser;
(b) formulate and implement continuing programs for the purchase and sale
of domestic equity securities and regularly report thereon to the
Fund's Board of Directors and the Adviser;
<PAGE>
(c) continuously review the Series' security holdings and the investment
program and the investment policies of the Series; and
(d) take, on behalf of the Series, all actions which appear necessary to
carry into effect such purchase and sale programs, including the
placement of orders for the purchase and sale of domestic equity
securities for the Series.
4. BROKER-DEALER RELATIONSHIPS. The Sub-Adviser is responsible for decisions
to buy and sell securities for the Series, broker/dealer selection, and
negotiation of brokerage commission rates. The Sub-Adviser's primary
consideration in effecting a security transaction will be execution at the
most favorable price. In selecting a broker/dealer to execute each
particular transaction, the Sub-Adviser will take the following into
consideration: the best net price available; the reliability, integrity and
financial condition of the broker/dealer; the size of and difficulty in
executing the order; and the value of the expected contribution of the
broker/dealer to the investment performance of the Series on a continuing
basis. Accordingly, the price to the Series in any transaction may be less
favorable than that available from another broker/dealer if the difference
is reasonably justified by other aspects of the portfolio execution
services offered. Subject to such policies as the Board of Directors may
determine, the Sub-Adviser shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of its having caused the Series to pay a broker for effecting a
portfolio investment transaction in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction
if the Sub-Adviser determines in good faith that such amount of commission
was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Sub-Adviser's
<PAGE>
overall responsibilities with respect to the Series and to its other
clients as to which it exercises investment discretion. The Sub-Adviser is
further authorized to place and/or to effect orders with such brokers and
dealers who may provide research or statistical material or other services
to the Series or to the Sub-Adviser. Such allocation shall be in such
amounts and proportions as the Sub-Adviser shall determine and the
Sub-Adviser will report on said allocations regularly to the Board of
Directors of the Fund and the Adviser indicating the brokers to whom such
allocations have been made and the basis therefor.
5. CONTROL BY BOARD OF DIRECTORS. Any investment program undertaken by the
Sub-Adviser pursuant to this Agreement, as well as any other activities
undertaken by the Sub-Adviser on behalf of the Series pursuant thereto,
shall at all times be subject to any directives of the Board of Directors
of the Fund.
6. COMPLIANCE WITH APPLICABLE REQUIREMENTS. In carrying out its obligations
under this Agreement, the Sub-Adviser shall ensure that the Series complies
with:
(a) all applicable provisions of the 1940 Act;
(b) the provisions of the Registration Statement of the Fund, as amended,
under the Securities Act of 1933 and the 1940 Act;
(c) all applicable statutes and regulations necessary to qualify the
Series as a Regulated Investment Company under Subchapter M of the
Internal Revenue Code (or any successor or similar provision), and
shall notify the Adviser immediately upon having a reasonable basis
for believing that the Series has ceased to so qualify or that it
might not so qualify in the future;
(d) the provisions of the Fund's Articles of Incorporation, as amended;
<PAGE>
(e) the provisions of the Bylaws of the Fund, as amended; and
(f) any other applicable provisions of state and federal law.
7. RECORDS. The Sub-Adviser hereby agrees to maintain all records relating to
its activities and obligations under this Agreement which are required to
be maintained by Rule 31a-1 under the 1940 Act and agrees to preserve such
records for the periods prescribed by Rule 31a-2 under the Act. The
Sub-Adviser further agrees that all such records are the property of the
Fund and agrees to surrender promptly to the Fund any such records upon the
Fund's request.
8. EXPENSES. The expenses connected with the Fund shall be borne by the
Sub-Adviser as follows:
(a) The Sub-Adviser shall maintain, at its expense and without cost to the
Adviser or the Series, a trading function in order to carry out its
obligations under subparagraph (d) of paragraph 3 hereof to place
orders for the purchase and sale of portfolio securities for the
Series.
(b) The Sub-Adviser shall pay any expenses associated with carrying out
its obligation under subparagraph (b) of paragraph 2 hereof to prepare
reports for the Fund's Board of Directors concerning issuers and
securities represented in the Series' portfolio and the expenses of
any travel by employees of the Sub-Adviser in connection with such
reports to the Fund's Board of Directors.
(c) The Sub-Adviser shall pay any expenses that it may incur in
communicating with the Adviser in connection with its obligations
under this Agreement, including the expenses of telephone calls,
special mail services and telecopier charges.
<PAGE>
9. DELEGATION OF RESPONSIBILITIES. Upon request of the Adviser and with the
approval of the Fund's Board of Directors, the Sub-Adviser may perform
services on behalf of the Fund which are not required by this Agreement.
Such services will be performed on behalf of the Fund, and the
Sub-Adviser's cost in rendering such services may be billed monthly to the
Adviser, subject to examination by the Adviser's independent accountants.
Payment or assumption by the Sub-Adviser of any Fund expense that the
Sub-Adviser is not required to pay or assume under this Agreement shall not
relieve the Adviser or the Sub-Adviser of any of their obligations to the
Fund or obligate the Sub-Adviser to pay or assume any similar Fund expense
on any subsequent occasions.
10. DELEGATION OF DUTIES. The Sub-Adviser may, at its discretion, delegate,
assign or subcontract any of the duties, responsibilities and services
governed by this agreement to a third party, whether or not by formal
written agreement, provided that such arrangement with a third party has
been approved by the Board of Directors of the Fund. The Sub-Adviser shall,
however, retain ultimate responsibility to the Fund and shall implement
such reasonable procedures as may be necessary for assuring that any
duties, responsibilities or services so assigned, subcontracted or
delegated are performed in conformity with the terms and conditions of this
agreement.
11. COMPENSATION. For the services to be rendered and the facilities furnished
hereunder, the Adviser shall pay the Sub-Adviser an annual fee equal to .15
percent of the average daily closing value of the net assets of the Series,
computed on a daily basis. Such fee shall be computed and payable monthly.
If this Agreement shall be effective for only a portion of a year, then the
Sub-Adviser's compensation for said year shall be prorated for such
portion. For purposes of this paragraph 11, the value of the net assets of
the Series shall be computed
<PAGE>
in the same manner at the end of the business day as the value of such net
assets is computed in connection with the determination of the net asset
value of the Series' shares as described in the Fund's prospectus and
statement of additional information. Payment of the Sub-Adviser's
compensation for the preceding month shall be made as promptly as possible
after the end of each month.
12. NON-EXCLUSIVITY. The services of the Sub-Adviser to the Adviser are not to
be deemed to be exclusive, and the Sub-Adviser shall be free to render
investment advisory or other services to others (including other investment
companies) and to engage in other activities, so long as its services under
this Agreement are not impaired thereby.
13. TERM. This Agreement shall become effective at the close of business on the
date first shown above. It shall remain in force and effect, subject to
paragraph 14 hereof for one year from the date hereof.
14. RENEWAL. Following the expiration of its initial year term, this Agreement
shall continue in force and effect from year to year, provided that such
continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Directors or (ii) by the vote of a majority
of the Series' outstanding voting securities (as defined in Section
2(a)(42) of the 1940 Act), and
(b) by the affirmative vote of a majority of the directors who are not
parties to this Agreement or interested persons of a party to this
Agreement (other than as a director of the Fund), by votes cast in
person at a meeting specifically called for such purpose.
15. TERMINATION. This Agreement may be terminated at any time, without the
payment of any penalty, by vote of the Fund's Board of Directors or by vote
of a majority of the Series' outstanding voting securities (as defined in
Section 2(a)(42) of the 1940 Act), or by the
<PAGE>
Adviser or by the Sub-Adviser on sixty (60) days' written notice to the
other party. This Agreement shall automatically terminate in the event of
its "assignment" as that term is defined in Section 2(a)(4) of the 1940
Act. This Agreement shall automatically terminate in the event that the
investment advisory contract between the Adviser and the Fund is
terminated, assigned or not renewed.
16. LIABILITY OF THE SUB-ADVISER. In the absence of willful misfeasance, bad
faith or gross negligence on the part of the Sub-Adviser or its officers,
directors or employees, or reckless disregard by the Sub-Adviser of its
duties under this Agreement, the Sub-Adviser shall not be liable to the
Adviser, the Fund or to any shareholder of the Fund for any act or omission
in the course of, or connected with, rendering services hereunder or for
any losses that may be sustained in the purchase, holding or sale of any
security, provided the Sub-Adviser has acted in good faith.
17. INDEMNIFICATION. The Adviser and the Sub-Adviser each agree to indemnify
the other against any claim against, loss, or liability to, such other
party (including reasonable attorney's fees) arising out of any action on
the part of the indemnifying party which constitutes willful misfeasance,
bad faith or gross negligence.
18. NOTICES. Any notices under this Agreement shall be in writing, addressed
and delivered or mailed postage-paid to the other party at such address as
such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the
Sub-Adviser for this purpose shall be 700 Harrison Street, Topeka, Kansas
66636-0001, and the address of the Adviser for this purpose shall be One
World Financial Center, 200 Liberty Street, New York, New York 10281.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the day and year first above
written.
ATTEST: MFR ADVISORS, INC.
BRUCE JENSEN By: MARIA F. RAMIREZ
- -------------------------------- ---------------------------------
Title: Executive Vice President
ATTEST: SECURITY MANAGEMENT COMPANY, LLC
AMY J. LEE By: JAMES R. SCHMANK
- -------------------------------- ---------------------------------
Title: Secretary James R. Schmank, President
<PAGE>
DISTRIBUTION AGREEMENT
THIS AGREEMENT, made this 14th day of September, 1970, between SECURITY BOND
FUND, INC., a Kansas corporation (hereinafter referred to as the "Company"), and
SECURITY DISTRIBUTORS, INC., a Kansas corporation (hereinafter referred to as
the "Distributor").
WITNESSETH:
WHEREAS, the Company is engaged in business as an open-end, management
investment company registered under the federal Investment Company Act of 1940;
and
WHEREAS, the Distributor is willing to act as principal underwriter for the
Company to offer for sale, sell and deliver after sale shares of the Company's
$1 par value common stock (hereinafter referred to as the "Shares") on the terms
and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
set forth, the parties hereto agree as follows:
1. EMPLOYMENT OF DISTRIBUTOR. The Company hereby employs the Distributor to
act as principal underwriter for the Company and hereby agrees that during
the term of this Agreement, and any renewal or extension thereof, or until
any prior termination thereof, the Distributor shall have the exclusive
right to offer for sale and to distribute any and all Shares issued or to
be issued by the Company. The Distributor hereby accepts such employment
and agrees to act as the distributor of the Shares issued or to be issues
by the Company during the period this Agreement is in effect and agrees
during such period to offer for sale such Shares as long as such Shares
remain available for sale, unless the Distributor is unable legally to make
such offer for sale as the result of any law or governmental regulation.
2. OFFERING PRICE AND COMMISSIONS. Prior to the issuance of any Shares by the
Company pursuant to any subscription tendered by or through the Distributor
and confirmed for sale to or through the Distributor, the Distributor shall
pay or cause to be paid to the Custodian of the Company in cash, an amount
equal to the net asset value of such Shares at the time of acceptance of
each such subscription and confirmation by the Company of the sale of such
Shares. The Distributor shall be entitled to charge a commission on each
such sale of Shares in the amount set forth in the Company's Prospectus,
such commission to be an amount equal to the difference between the net
asset value and the offering price of the Shares, as such offering price
may from time to time be determined by the board of directors of the
Company. All Shares shall be sold to the public only at their public
offering price at the time of such sale, and the Company shall receive not
less than the full net asset value thereof.
3. ALLOCATION OF EXPENSES AND CHARGES. During the period this Agreement is in
effect, the Company shall pay all costs and expenses in connection with the
registration of Shares under the Securities Act of 1933, including all
expenses in connection with the preparation and printing of any
registration statements and prospectuses necessary for registration
thereunder but excluding any additional costs and expenses incurred in
furnishing the Distributor with prospectuses.
<PAGE>
During the period this Agreement is in effect the Distributor will pay or
reimburse the Company for:
(a) All costs, expenses and fees incurred in connection with the
qualification of the Shares under the applicable Blue Sky laws of the
states in which the Shares are offered;
(b) All costs and expenses of printing and mailing prospectuses (other
than to existing shareholders) and confirmations, and all costs and
expenses of preparing, printing and mailing advertising material sales
literature, circulars, applications, and other materials used or to be
used in connection with the offering for sale and the sale of Shares;
and
(c) All clerical and administrative costs in processing the applications
for and in connection with the sale of Shares.
The Distributor agrees to submit to the Company for its prior approval
all advertising material, sales literature, circulars and any other
material which the Distributor proposes to use in connection with the
offering for sale of Shares.
4. DISTRIBUTOR MAY ACT AS BROKER AND RECEIVE COMMISSIONS. Notwithstanding any
other provisions of this Agreement, it is understood and agreed that the
Distributor may act as a broker, on behalf of the Company, in the purchase
and sale of securities not effected on a securities exchange, provided that
any such transactions and any commission paid in connection therewith shall
comply in every respect with the requirements of the Federal Investment
Company Act of 1940 and in particular with Section 17(c) of said statute
and the Rules and Regulations of the Securities and Exchange Commission
promulgated thereunder.
5. AGREEMENT SUBJECT TO APPLICABLE LAW AND REGULATIONS. The parties hereto
agree that all provisions of this Agreement will be performed in strict
accordance with the requirements of the Investment Company Act of 1940, the
Securities Act of 1933, the Securities Exchange Act of 1934, and the rules
and regulations of the Securities and exchange Commission under said
statutes, in strict accordance with all applicable state "Blue Sky" laws
and the rules and regulations thereunder, and in strict accordance with the
provisions of the Articles of Incorporation and Bylaws of the Company.
6. DURATION AND TERMINATION OF AGREEMENT. This Agreement shall become
effective at the date and time that the Company's prospectus, reflecting
the underwriting arrangements provided by this Agreement, shall become
effective under the Securities Act of 1933, and shall continue in force
until December 31, 1971, and from year to year thereafter, but only if such
continuance is specifically approved at least annually by the board of
directors of the Company and the majority of the board of directors who are
not parties to this Agreement or affiliated persons of any such party, or
by the vote of a majority of the outstanding voting securities of the
Company. Written notice of any such approval by the board of directors or
by the holders of a majority of the outstanding voting securities of the
Company shall be given promptly to the Distributor.
<PAGE>
This Agreement may be terminated by the Company at any time by giving the
Distributor at least sixty (60) days previous written notice of such
intention to terminate. This Agreement may be terminated by the Distributor
at any time by giving the Company at least sixty (60) days previous written
notice of such intention to terminate.
This Agreement shall terminate automatically in the event of its assignment
by the Distributor. As used in the preceding sentence, the word
"assignment" shall have the meaning set forth in Section 2(a)(4) of the
Investment Company Act of 1940.
7. CONSTRUCTION OF AGREEMENT. No provision of this Agreement is intended to or
shall be construed as protecting the Distributor against any liability to
the Company or to the Company's security holders to which the Distributor
would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties or by reason of the
Distributor's reckless disregard of its obligations and duties under this
Agreement.
Terms or words used in this Agreement, which also occur in the Articles of
Incorporation or Bylaws of the Company, shall have the same meaning herein
as given to such terms or words in Articles of Incorporation or Bylaws of
the Company.
8. DISTRIBUTOR AN INDEPENDENT CONTRIBUTOR. The Distributor shall be deemed to
be an independent contractor and, except as expressly provided or
authorized by the Company, shall have no authority to act for or represent
the Company.
9. NOTICE. Any notice required or permitted to be given hereunder to either of
the parties hereto shall be deemed to have been given if mailed by
certified mail in a postage prepaid envelope addressed to the respective
party as follows, unless any such party has notified the other party hereto
that notices thereafter intended for such party shall be mailed to some
other address, in which event notices thereafter shall be addressed to such
party at the address designated in such request:
Security Bond Fund, Inc.
Security Benefit Life Building
700 Harrison Street
Topeka, Kansas
Security Distributors, Inc.
Security Benefit Life Building
700 Harrison Street
Topeka, Kansas
10. AMENDMENT OF AGREEMENT. No amendment to this Agreement shall be effective
until approved by (a) a majority of the board of directors of the Company
and a majority of the board of directors of the Company who are not parties
to this Agreement or affiliated persons of any such party, or (b) a vote of
the holders of a majority of the outstanding voting securities of the
Company.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective corporate officers thereto duly authorized on the
day, month and year first above written.
SECURITY BOND FUND, INC.
By DEAN L. SMITH
President
ATTEST:
WILL J. MILLER, JR.
Secretary
(SEAL)
SECURITY DISTRIBUTORS, INC.
By DAVE E. DAVIDSON
President
ATTEST:
WILL J. MILLER, JR.
Secretary
<PAGE>
AMENDMENT TO DISTRIBUTION AGREEMENT
WHEREAS, Security Bond Fund, Inc. (the "Company") and Security Distributors,
Inc. (the "Distributor") are parties to a Distribution Agreement dated as of
September 14, 1970, (the "Distribution Agreement ) under which the Distributor
agrees to act as principal underwriter in connection with sales of the shares of
the Company's capital stock; and,
WHEREAS, certain provisions of the Federal Investment Company Act of 1940 have
been amended, and those amendments have an effect upon the relationship between
the Company and the Distributor, and the Distribution Agreement; and,
WHEREAS, The Company and the Distributor wish to amend the Distribution
Agreement to conform to the requirements of the Federal Investment Company Act
of 1940, as amended:
NOW, THEREFORE, The Company and Distributor hereby amend the Distribution
Agreement, effective immediately, as follows:
1. Section 6 of the Distribution Agreement is amended to provide as follows:
"6. DURATION AND TERMINATION OF AGREEMENT. This Agreement shall become
effective at the date and time that the Company's prospectus,
reflecting the underwriting arrangements provided by this Agreement,
shall become effective under the Securities Act of 1933, and shall
continue in force until December 31, 1971, and from year to year
thereafter, provided that such continuance for each successive year
after April 30, 1972, is specifically approved in advance at least
annually by the vote of the board of directors (including approval by
the vote of a majority of the directors of the Company who are not
parties to the Agreement or interested persons of any such party) cast
in person at a meeting called for the purpose of voting upon such
approval, or by the vote of a majority (as defined in the Investment
Company Act of 1940) of the outstanding voting securities of the
Company and by such a vote of the board of directors. As used in the
preceding sentence, the words "interested persons" shall have the
meaning set forth in Section 2(a)(19) of the Investment Company Act of
1940. Written notice of any such approval by the board of directors or
by the holders of a majority of the outstanding voting securities of
the Company shall be given promptly to the Distributor.
This Agreement may be terminated by the Company at any time by giving the
Distributor at least sixty (60) days previous written notice of such intention
to terminate. This Agreement may be terminated by the Distributor at any time by
giving the Company at least sixty (60) days previous written notice of such
intention to terminate.
This Agreement shall terminate automatically in the event of its assignment. As
used in the preceding sentence, the word "assignment" shall have the meaning set
forth in Section 2(a)(4) of the Investment Company Act of 1940."
<PAGE>
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Distribution Agreement this 14th day of January 1972.
SECURITY BOND FUND, INC.
By DEAN L. SMITH
President
(Corporate Seal)
ATTEST:
WILL J. MILLER, JR.
Secretary
SECURITY DISTRIBUTORS, INC.
By DAVE E. DAVIDSON
President
(Corporate Seal)
ATTEST:
WILL J. MILLER, JR.
Secretary
<PAGE>
AMENDMENT TO DISTRIBUTION AGREEMENT
WHEREAS, Security Income Fund (the "Company"), formerly Security Bond Fund, and
Security Distributors, Inc. (the "Distributor") are parties to a Distribution
Agreement dated as of September 14, 1970, (the "Distribution Agreement") under
which the Distributor agrees to act as principal underwriter in connection with
the sales of shares of the Company's capital stock; and
WHEREAS, a Distribution Plan (the "Plan") has been adopted by the directors and
shareholders of Security Income Fund pursuant to Rule 12b-1 under the Investment
Company Act of 1940 (the "Act"), the provisions of which have an effect upon the
relationship between the Company and the Distributor, and the Distribution
Agreement; and
WHEREAS, the Company and Distributor wish to amend the Distribution Agreement to
conform to the requirements of Rule 12b-1 under the Act and to incorporate the
necessary provisions into the Agreement.
NOW THEREFORE, the Company and Distributor hereby amend the Distribution
Agreement, effective immediately, as follows:
1. New Section 4A is added to the Agreement, which provides as follows:
4A. DISTRIBUTION PLAN.
(a) Pursuant to a Distribution Plan adopted by the Fund, the Fund agrees to
make monthly payments to the Distributor in an amount computed at an
annual rate of .25 of 1% of the Fund's average daily net assets, to
finance activities undertaken by the Distributor for the purpose of
distributing the Fund's shares to investors. The Distributor is
obligated to and hereby agrees to use the entire amount of said fee to
finance the following distribution-related activities:
(i) Preparation, printing and distribution of the Prospectus and
Statement of Additional Information and any supplement thereto
used in connection with the offering of shares to the public;
(ii) Printing of additional copies for use by the Distributor as
sales literature, of reports and other communications which were
prepared by the Fund for distribution to existing shareholders;
(iii) Preparation, printing and distribution of any other sales
literature used in connection with the offering of shares to the
public;
(iv) Expenses incurred in advertising, promoting and selling shares
of the Fund to the public; and
<PAGE>
(v) Any fees paid by the Distributor to securities dealers as
distribution or service fees who have executed a Dealer's
Distribution Agreement with the Distributor.
(b) All payments to the Distributor pursuant to this paragraph are subject
to the following conditions being met by the Distributor:
(i) For the fiscal year of the Fund during which this Plan becomes
effective and for each subsequent fiscal year of the Fund during
which this Plan remains in effect, the Distributor shall submit
to the Fund a budget setting forth in reasonable detail the
distribution-related activities to which the Distributor
proposes to apply payments made by the Fund hereunder;
(ii) Before any payment is made to the Distributor in respect of any
fiscal year, the budget relating thereto shall be approved by
vote of the Fund's Directors, including the affirmative vote of
a majority of the Independent Directors.
(iii) The Distributor shall furnish the Fund with quarterly reports of
its expenditures pursuant to each budget so approved, together
with receipts or other appropriate written evidence of the
amounts expended, and such other information relating to such
budget or expenditures or to the other distribution-related
activities undertaken or proposed to be undertaken by the
Distributor during such fiscal year under its Distribution
Agreement with the Fund as the Fund may reasonably request;
(c) The Dealer's Distribution Agreement (the "Agreement") contemplated by
paragraph 2(v) above shall permit payments to securities dealers by the
Distributor only in accordance with the provisions of this paragraph
and shall have the approval of the majority of the Board of Directors
of the Fund including a majority of the directors who are not
interested persons of the Fund as required by the Rule. The Distributor
may pay to the other party to any Agreement a quarterly fee for
distribution and marketing services provided by such other party. Such
quarterly fee shall be payable in arrears in an amount equal to such
percentage (not in excess of .000685% per day) of the aggregate net
asset value of the shares held by such other party's customers or
clients at the close of business each day as determined from time to
time by the Distributor. The distribution and marketing services
contemplated hereby shall include, but are not limited to, answering
inquiries regarding the Fund, account designations and addresses,
maintaining the investment of such other party's customers or clients
in the Fund and similar services. In determining the extent of such
other party's assistance in maintaining such investment by its
customers or clients, the Distributor may take into account the
possibility that the shares held by such customer or client would be
redeemed in the absence of such quarterly fee.
<PAGE>
(d) The provisions of the Distribution Plan approved by the Shareholders of
the Fund on July 12, 1985, and by the Board of Directors of the Fund on
May 3, 1985, are fully incorporated herein by reference. In the event
the Distribution Plan is terminated by the Board of Directors or
Shareholders of the Fund as provided therein, this paragraph shall no
longer be effective.
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Distribution Agreement this 15th day of August 1985.
SECURITY INCOME FUND
By EVERETT S. GILLE
President
ATTEST:
BARBARA W. RANKIN
Secretary
SECURITY DISTRIBUTORS, INC.
By EVERETT S. GILLE
President
ATTEST:
BARBARA W. RANKIN
Secretary
<PAGE>
AMENDMENT TO DISTRIBUTION AGREEMENT
WHEREAS, Security Income Fund (the "Fund"), formerly Security Bond Fund, and
Security Distributors, Inc. (the "Distributor") are parties to a Distribution
Agreement dated September 14, 1970, as amended January 14, 1972, and August 15,
1985, (the "Distribution Agreement") under which the Distributor agrees to act
as principal underwriter in connection with the sales of shares of the Fund's
capital stock;
WHEREAS, a Distribution Plan (the "Plan") has been adopted by the directors and
shareholders of the Fund pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act"), certain provisions of which have been incorporated into the
Distribution Agreement;
WHEREAS, the Board of Directors of the Fund (including all directors who are not
interested persons of the Fund as defined in the Act) have approved an amendment
to the Plan to provide for expenditures under the Plan to promote sales of
shares of the Fund by securities dealers; and
WHEREAS, the Fund and Distributor wish to amend the Distribution Agreement to
incorporate the Plan amendments into the Agreement.
NOW, THEREFORE, the Fund and Distributor hereby amend the Distribution
Agreement, effective November 26, 1990, as follows:
Section 4A., Distribution Plan, is amended by adding the following Section
4A.(a)(vi):
(vi) Expenses incurred in promoting sales of shares of the Fund by
securities dealers, including the costs of preparation of materials
for presentations, travel expenses, costs of entertainment, and other
expenses incurred in connection with promoting sales of Fund shares
by dealers.
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Distribution Agreement this 26th day of November 1990.
SECURITY INCOME FUND
By MICHAEL J. PROVINES
President
ATTEST:
AMY J. LEE
Secretary
SECURITY DISTRIBUTORS, INC.
By HOWARD R. FRICKE
President
ATTEST:
AMY J. LEE
Secretary
<PAGE>
AMENDMENT TO DISTRIBUTION AGREEMENT
WHEREAS, Security Income Fund (the "Company") and Security Distributors, Inc.
(the "Distributor") are parties to a Distribution Agreement dated September 14,
1970, as amended (the "Distribution Agreement"), under which the Distributor
agreed to act as principal underwriter in connection with sales of the shares of
the Company's capital stock; and
WHEREAS, the Company expects to receive an exemptive order from the Securities
and Exchange Commission allowing the Company to issue and offer for sale two or
more classes of the Company's capital stock; and
WHEREAS, the Company and the Distributor wish to amend the Distribution
Agreement to clarify that the Distribution Agreement applies only to the sale of
Class A shares of the capital stock of the Corporate Bond Series and U.S.
Government Series of the Company and the Class A shares of all other Series
subsequently established by the Company:
NOW THEREFORE, the Company and Distributor hereby amend the Distribution
Agreement, effective immediately, as follows:
1. The term "Shares" as referred to in the Distribution Agreement shall refer
to the Class A Shares of the Company's $1.00 par value stock.
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Distribution Agreement this 1st day of October 1993.
SECURITY INCOME FUND
By: MICHAEL J. PROVINES
President
ATTEST:
AMY J. LEE
Secretary
(SEAL)
SECURITY DISTRIBUTORS, INC.
By: HOWARD R. FRICKE
President
ATTEST:
AMY J. LEE
Secretary
(SEAL)
<PAGE>
AMENDMENT TO DISTRIBUTION AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Distributors, Inc. (the
"Distributor") are parties to a Distribution Agreement dated September 14, 1970,
as amended (the "Distribution Agreement"), under which the Distributor has
agreed to act as principal underwriter in connection with sales of the shares of
the Fund's Class A common stock;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Limited
Maturity Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series and U.S. Government Series;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Limited Maturity Bond Series in two
classes, designated Class A shares and Class B shares; and
WHEREAS, on October 21, 1994, the Board of Directors of the Fund approved an
amendment to the Distribution Agreement between the Fund and the Distributor to
include the sale of Class A shares of the Limited Maturity Bond Series;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Distributor hereby amend the
Distribution Agreement to include the sale of Class A shares of the Limited
Maturity Bond Series of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Distribution Agreement this 30th day of December 1994.
SECURITY INCOME FUND
By: JOHN D. CLELAND
President
ATTEST:
AMY J. LEE
Secretary
SECURITY DISTRIBUTORS, INC.
By: RICHARD K RYAN
President
ATTEST:
AMY J. LEE
Secretary
<PAGE>
AMENDMENT TO DISTRIBUTION AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Distributors, Inc. (the
"Distributor") are parties to a Distribution Agreement dated September 14, 1970,
as amended (the "Distribution Agreement"), under which the Distributor has
agreed to act as principal underwriter in connection with sales of the shares of
the Fund's Class A common stock;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Global
Aggressive Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series, Limited Maturity Bond Series and U.S. Government
Series;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Global Aggressive Bond Series in two
classes, designated Class A shares and Class B shares; and
WHEREAS, on February 3, 1995, the Board of Directors of the Fund approved an
amendment to the Distribution Agreement between the Fund and the Distributor to
include the sale of Class A shares of the Global Aggressive Bond Series;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Distributor hereby amend the
Distribution Agreement to include the sale of Class A shares of the Global
Aggressive Bond Series of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Distribution Agreement this 18th day of April, 1995.
ATTEST: SECURITY INCOME FUND
AMY J. LEE By: JOHN D. CLELAND
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary John D. Cleland, President
ATTEST: SECURITY DISTRIBUTORS, INC.
AMY J. LEE By: RICHARD K RYAN
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary Richard K Ryan, President
<PAGE>
AMENDMENT TO DISTRIBUTION AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Distributors, Inc. (the
"Distributor") are parties to a Distribution Agreement dated September 14, 1970,
as amended (the "Distribution Agreement"), under which the Distributor has
agreed to act as principal underwriter in connection with sales of the shares of
the Fund's Class A common stock;
WHEREAS, on May 3, 1996, the Board of Directors of the Fund authorized the Fund
to offer its common stock in a new series designated as the High Yield Series,
in addition to its presently offered series of common stock of Corporate Bond
Series, Limited Maturity Bond Series, U.S. Government Series and Global
Aggressive Bond Series;
WHEREAS, on May 3, 1996, the Board of Directors of the Fund further authorized
the Fund to offer shares of the High Yield Series in two classes, designated
Class A shares and Class B shares; and
WHEREAS, on May 3, 1996, the Board of Directors of the Fund approved an
amendment to the Distribution Agreement between the Fund and the Distributor to
include the sale of Class A shares of the High Yield Series;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Distributor hereby amend the
Distribution Agreement to include the sale of Class A shares of the High Yield
Series of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Distribution Agreement this 13th day of May, 1996.
ATTEST: SECURITY INCOME FUND
AMY J. LEE By: JOHN D. CLELAND
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary John D. Cleland, President
ATTEST: SECURITY DISTRIBUTORS, INC.
AMY J. LEE By: RICHARD K RYAN
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary Richard K Ryan, President
<PAGE>
AMENDMENT TO DISTRIBUTION AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Distributors, Inc. (the
"Distributor") are parties to a Distribution Agreement dated September 14, 1970,
as amended (the "Distribution Agreement"), under which the Distributor has
agreed to act as principal underwriter in connection with sales of the shares of
the Fund's Class A common stock;
WHEREAS, on February 7, 1997, the Board of Directors of the Fund authorized the
Fund to offer its common stock in two new series designated as the Emerging
Markets Total Return Series and Global Asset Allocation Series, in addition to
its presently offered series of common stock of Corporate Bond Series, Limited
Maturity Bond Series, U.S. Government Series, Global Aggressive Bond Series and
High Yield Series;
WHEREAS, on February 7, 1997, the Board of Directors of the Fund further
authorized the Fund to offer shares for each of the Emerging Markets Total
Return Series and Global Asset Allocation Series in two classes, designated
Class A shares and Class B shares; and
WHEREAS, on February 7, 1997, the Board of Directors of the Fund approved an
amendment to the Distribution Agreement between the Fund and the Distributor to
include the sale of Class A shares for each of the Emerging Markets Total Return
Series and Global Asset Allocation Series;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Distributor hereby amend the
Distribution Agreement to include the sale of Class A shares for each of the
Emerging Markets Total Return Series and Global Asset Allocation Series of the
Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Distribution Agreement this 12th day of March, 1997.
ATTEST: SECURITY INCOME FUND
By: AMY J. LEE By: JOHN D. CLELAND
-------------------------------- --------------------------------
Amy J. Lee, Secretary John D. Cleland, President
ATTEST: SECURITY DISTRIBUTORS, INC.
By: AMY J. LEE By: RICHARD K RYAN
-------------------------------- --------------------------------
Amy J. Lee, Secretary Richard K Ryan, President
<PAGE>
CLASS B
DISTRIBUTION AGREEMENT
THIS AGREEMENT, made this 1st day of October 1993, between Security Income Fund,
a Kansas corporation (hereinafter referred to as the "Company"), and Security
Distributors, Inc., a Kansas corporation (hereinafter referred to as the
"Distributor").
WITNESSETH:
WHEREAS, the Company is engaged in business as an open-end, management
investment company registered under the federal Investment Company Act of 1940
(the "1940 Act"); and
WHEREAS, the Distributor is willing to act as principal underwriter for the
Company to offer for sale, sell and deliver after sale, the Class B Shares of
the Company's $1.00 par value common stock (hereinafter referred to as the
"Shares") on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
set forth, the parties hereto agree as follows:
1. EMPLOYMENT OF DISTRIBUTOR. The Company hereby employs the Distributor to
act as principal underwriter for the Company with respect to its Class B
Shares and hereby agrees that during the term of this Agreement, and any
renewal or extension thereof, or until any prior termination thereof, the
Distributor shall have the exclusive right to offer for sale and to
distribute any and all of its Class B Shares issued or to be issued by the
Company. The Distributor hereby accepts such employment and agrees to act
as the distributor of the Class B Shares issued or to be issued by the
Company during the period this Agreement is in effect and agrees during
such period to offer for sale such Shares as long as such Shares remain
available for sale, unless the Distributor is unable legally to make such
offer for sale as the result of any law or governmental regulation.
2. OFFERING PRICE AND COMMISSIONS. Prior to the issuance of any Shares by the
Company pursuant to any subscription tendered by or through the Distributor
and confirmed for sale to or through the Distributor, the Distributor shall
pay or cause to be paid to the custodian of the Company in cash, an amount
equal to the net asset value of such Shares at the time of acceptance of
each such subscription and confirmation by the Company of the sale of such
Shares. All Shares shall be sold to the public only at their public
offering price at the time of such sale, and the Company shall receive not
less than the full net asset value thereof.
3. ALLOCATION OF EXPENSES AND CHARGES. During the period this Agreement is in
effect, the Company shall pay all costs and expenses in connection with the
registration of Shares under the Securities Act of 1933 (the "1933 Act"),
including all expenses in connection with the preparation and printing of
any registration statements and prospectuses necessary for registration
thereunder but excluding any additional costs and expenses incurred in
furnishing the Distributor with prospectuses.
-1-
<PAGE>
The Company will also pay all costs, expenses and fees incurred in connection
with the qualification of the Shares under the applicable Blue Sky laws of the
states in which the Shares are offered.
During the period this Agreement is in effect, the Distributor will pay or
reimburse the Company for:
(a) All costs and expenses of printing and mailing prospectuses (other
than to existing shareholders) and confirmations, and all costs and
expenses of preparing, printing and mailing advertising material,
sales literature, circulars, applications, and other materials used or
to be used in connection with the offering for sale and the sale of
Shares; and
(b) All clerical and administrative costs in processing the applications
for and in connection with the sale of Shares.
The Distributor agrees to submit to the Company for its prior approval all
advertising material, sales literature, circulars and any other material which
the Distributor proposes to use in connection with the offering for sale of
Shares.
4. REDEMPTION OF SHARES. The Distributor, as agent of and for the account of
the Fund, may redeem Shares of the Fund offered for resale to it at the net
asset value of such Shares (determined as provided in the Articles of
Incorporation or Bylaws) and not in excess of such maximum amounts as may
be fixed from time to time by an officer of the Fund. Whenever the officers
of the Fund deem it advisable for the protection of the shareholders of the
Fund, they may suspend or cancel such authority.
5. SALES CHARGES. A contingent deferred sales charge shall be retained by the
Distributor from the net asset value of Shares of the Fund that it has
redeemed, it being understood that such amounts will not be in excess of
that set forth in the then-current registration statement of the Fund.
Furthermore, the Distributor may retain any amounts authorized for payment
to it under the Fund's Distribution Plan.
6. DISTRIBUTOR MAY ACT AS BROKER AND RECEIVE COMMISSIONS. Notwithstanding any
other provisions of this Agreement, it is understood and agreed that the
Distributor may act as a broker, on behalf of the Company, in the purchase
and sale of securities not effected on a securities exchange, provided that
any such transactions and any commission paid in connection therewith shall
comply in every respect with the requirements of the 1940 Act and in
particular with Section 17(e) of that Act and the rules and regulations of
the Securities and Exchange Commission promulgated thereunder.
7. AGREEMENTS SUBJECT TO APPLICABLE LAW AND REGULATIONS. The parties hereto
agree that all provisions of this Agreement will be performed in strict
accordance with the requirements of: the 1940 Act, the 1933 Act, the
Securities Exchange Act of 1934, the rules and regulations of the
Securities and Exchange Commission under said statutes, all applicable
state Blue Sky laws and the rules and regulations thereunder, the rules of
the National Association of Securities Dealers, Inc., and, in strict
accordance with, the provisions of the Articles of Incorporation and Bylaws
of the Company.
-2-
<PAGE>
8. DURATION AND TERMINATION OF AGREEMENT. This Agreement shall become
effective at the date and time that the Company's prospectus, reflecting
the underwriting arrangements provided by this Agreement, shall become
effective under the 1933 Act, and shall, unless terminated as provided
herein, continue in force for two years from that date, and from year to
year thereafter, provided that such continuance for each successive year is
specifically approved in advance at least annually by either the Board of
Directors or by the vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Company and, in either event, by the
vote of a majority of the directors of the Company who are not parties to
this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting upon such approval. As used in the
preceding sentence, the words "interested persons" shall have the meaning
set forth in Section 2(a)(19) of the 1940 Act. Written notice of any such
approval by the Board of Directors or by the holders of a majority of the
outstanding voting securities of the Company and by the directors who are
not such interested persons shall be given promptly to the Distributor.
This Agreement may be terminated at any time without the payment of any penalty
by the Company by giving the Distributor at least sixty (60) days' previous
written notice of such intention to terminate. This Agreement may be terminated
by the Distributor at any time by giving the Company at least sixty (60) days'
previous written notice of such intention to terminate.
This Agreement shall terminate automatically in the event of its assignment. As
used in the preceding sentence, the word "assignment" shall have the meaning set
forth in Section 2(a)(4) of the 1940 Act.
9. CONSTRUCTION OF AGREEMENT. No provision of this Agreement is intended to or
shall be construed as protecting the Distributor against any liability to
the Company or to the Company's security holders to which the Distributor
would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties under this Agreement.
Terms or words used in the Agreement, which also occur in the Articles of
Incorporation or Bylaws of the Company, shall have the same meaning herein as
given to such terms or words in the Articles of Incorporation or Bylaws of the
Company.
10. DISTRIBUTOR AN INDEPENDENT CONTRACTOR. The Distributor shall be deemed to
be an independent contractor and, except as expressly provided or
authorized by the Company, shall have no authority to act for or represent
the Company.
11. NOTICE. Any notice required or permitted to be given hereunder to either of
the parties hereto shall be deemed to have been given if mailed by
certified mail in a postage-prepaid envelope addressed to the respective
party as follows, unless any such party has notified the other party hereto
that notices thereafter intended for such party shall be mailed to some
other address, in which event notices thereafter shall be addressed to such
party at the address designated in such request:
-3-
<PAGE>
Security Income Fund
Security Benefit Group Building
700 Harrison
Topeka, Kansas
Security Distributors, Inc.
Security Benefit Group Building
700 Harrison
Topeka, Kansas
12. AMENDMENT OF AGREEMENT. No amendment to this Agreement shall be effective
until approved by (a) a majority of the Board of Directors of the Company
and a majority of the directors of the Company who are not parties to this
Agreement or affiliated persons of any such party, or (b) a vote of the
holders of a majority of the outstanding voting securities of the Company.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
by their respective corporate officers thereto duly authorized on the day, month
and year first above written.
SECURITY INCOME FUND
BY: MICHAEL J. PROVINES
President
ATTEST:
AMY J. LEE
Secretary
(SEAL)
SECURITY DISTRIBUTORS, INC.
BY: HOWARD R. FRICKE
President
ATTEST:
AMY J. LEE
Secretary
(SEAL)
-4-
<PAGE>
AMENDMENT TO CLASS B DISTRIBUTION AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Distributors, Inc. (the
"Distributor") are parties to a Class B Distribution Agreement dated October 1,
1994 (the "Distribution Agreement"), under which the Distributor has agreed to
act as principal underwriter in connection with sales of the shares of the
Fund's Class B common stock;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Limited
Maturity Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series and U.S. Government Series;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Limited Maturity Bond Series in two
classes, designated Class A shares and Class B shares; and
WHEREAS, on October 21, 1994, the Board of Directors of the Fund approved an
amendment to the Class B Distribution Agreement between the Fund and the
Distributor to include the sale of Class B shares of the Limited Maturity Bond
Series;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Distributor hereby amend the
Class B Distribution Agreement to include the sale of Class B shares of the
Limited Maturity Bond Series of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the Class
B Distribution Agreement this 30th day of December 1994.
SECURITY INCOME FUND
By: JOHN D. CLELAND
President
ATTEST:
AMY J. LEE
Secretary
SECURITY DISTRIBUTORS, INC.
By: RICHARD K RYAN
President
ATTEST:
AMY J. LEE
Secretary
-5-
<PAGE>
AMENDMENT TO CLASS B DISTRIBUTION AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Distributors, Inc. (the
"Distributor") are parties to a Class B Distribution Agreement dated October 1,
1993 (the "Distribution Agreement"), under which the Distributor has agreed to
act as principal underwriter in connection with sales of the shares of the
Fund's Class B common stock;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Global
Aggressive Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series, Limited Maturity Bond Series and U.S. Government
Series;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Global Aggressive Bond Series in two
classes, designated Class A shares and Class B shares; and
WHEREAS, on February 3, 1995, the Board of Directors of the Fund approved an
amendment to the Class B Distribution Agreement between the Fund and the
Distributor to include the sale of Class B shares of the Global Aggressive Bond
Series;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Distributor hereby amend the
Class B Distribution Agreement to include the sale of Class B shares of the
Global Aggressive Bond Series of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the Class
B Distribution Agreement this 18th day of April, 1995.
ATTEST: SECURITY INCOME FUND
AMY J. LEE By: JOHN D. CLELAND
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary John D. Cleland, President
ATTEST: SECURITY DISTRIBUTORS, INC.
AMY J. LEE By: RICHARD K RYAN
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary Richard K Ryan, President
-6-
<PAGE>
AMENDMENT TO CLASS B DISTRIBUTION AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Distributors, Inc. (the
"Distributor") are parties to a Class B Distribution Agreement dated October 1,
1993, as amended (the "Distribution Agreement"), under which the Distributor has
agreed to act as principal underwriter in connection with sales of the shares of
the Fund's Class B common stock;
WHEREAS, on May 3, 1996, the Board of Directors of the Fund authorized the Fund
to offer its common stock in a new series designated as the High Yield Series,
in addition to its presently offered series of common stock of Corporate Bond
Series, U.S. Government Series, Limited Maturity Bond Series, and Global
Aggressive Bond Series;
WHEREAS, on May 3, 1996, the Board of Directors of the Fund further authorized
the Fund to offer shares of the High Yield Series in two classes, designated
Class A shares and Class B shares; and
WHEREAS, on May 3, 1996, the Board of Directors of the Fund approved an
amendment to the Class B Distribution Agreement between the Fund and the
Distributor to include the sale of Class B shares of the High Yield Series;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Distributor hereby amend the
Class B Distribution Agreement to include the sale of Class B shares of the High
Yield Series of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the Class
B Distribution Agreement this 13th day of May 1996.
ATTEST: SECURITY INCOME FUND
AMY J. LEE By: JOHN D. CLELAND
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary John D. Cleland, President
ATTEST: SECURITY DISTRIBUTORS, INC.
AMY J. LEE By: RICHARD K RYAN
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary Richard K Ryan, President
<PAGE>
AMENDMENT TO CLASS B DISTRIBUTION AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Distributors, Inc. (the
"Distributor") are parties to a Class B Distribution Agreement dated October 1,
1993, as amended (the "Distribution Agreement"), under which the Distributor has
agreed to act as principal underwriter in connection with sales of the shares of
the Fund's Class B common stock;
WHEREAS, on February 7, 1997, the Board of Directors of the Fund authorized the
Fund to offer its common stock in two new series designated as the Emerging
Markets Total Return Series and the Global Asset Allocation Series, in addition
to its presently offered series of common stock of Corporate Bond Series, U.S.
Government Series, Limited Maturity Bond Series, Global Aggressive Bond Series,
and High Yield Series;
WHEREAS, on February 7, 1997, the Board of Directors of the Fund further
authorized the Fund to offer shares for each of the Emerging Markets Total
Return Series and the Global Asset Allocation Series in two classes, designated
Class A shares and Class B shares; and
WHEREAS, on February 7, 1997, the Board of Directors of the Fund approved an
amendment to the Class B Distribution Agreement between the Fund and the
Distributor to include the sale of Class B shares for each of the Emerging
Markets Total Return Series and the Global Asset Allocation Series;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Distributor hereby amend the
Class B Distribution Agreement to include the sale of Class B shares for each of
the Emerging Markets Total Return Series and the Global Asset Allocation Series
of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the Class
B Distribution Agreement this 12th day of March, 1997.
ATTEST: SECURITY INCOME FUND
By: AMY J. LEE By: JOHN D. CLELAND
-------------------------------- --------------------------------
Amy J. Lee, Secretary John D. Cleland, President
ATTEST: SECURITY DISTRIBUTORS, INC.
By: AMY J. LEE By: RICHARD K RYAN
-------------------------------- --------------------------------
Amy J. Lee, Secretary Richard K Ryan, President
<PAGE>
SECURITY INCOME FUND
Non-Qualified Deferred Compensation Plan
For Outside Directors
ELECTION FORM
Pursuant to the Security Income Fund Non-Qualified Deferred Compensation Plan
for Outside Directors (the "Plan"), I hereby make the following elections:
1. ELECTION TO DEFER: I hereby elect to defer ________ percent of the
compensation payable to me by the Fund for services rendered as a
director ("Directors' Fees") after the date I deliver this form to the
Secretary of the Fund. I understand that the election under this
paragraph 1 is irrevocable with respect to Directors' Fees payable to me
for the remainder of calendar year 1993, and that it shall apply to each
calendar year thereafter until I, on or before any December 15, notify
the Fund's Secretary in writing that a different election shall apply to
the following calendar years. I further understand that any Directors'
Fees that are not deferred under this Plan shall be paid in accordance
with normal Fund policy.
[2. ELECTION OF FORM OF PAYMENT: I hereby elect to have my benefit paid in
quarterly installments over a period of ________ years. I understand that
the election under this Paragraph 2 may not be changed at any time with
respect to amounts deferred in accordance with Paragraph 1 of this
Election Form.]
3. DESIGNATION OF BENEFICIARY: I understand that I may designate a
beneficiary who, in the event of my death before all amounts due to me
under the Plan have been distributed, will receive such amounts. I hereby
designate as my beneficiary:
Name Relationship
1.
If a person is named above as beneficiary and such person does not survive me, I
hereby designate as my contingent beneficiary:
Name Relationship
2.
If no beneficiary has been designated under this Paragraph 3, or all beneficiary
designations are ineffective, then benefits payable hereunder shall be paid to
my estate. Any benefits which may be payable to my beneficiary shall be paid in
installments pursuant to the schedule elected under Paragraph 2, should I die
after ceasing to be a Director, or in a lump sum, should I die while still
engaged as a Director of the Fund.
<PAGE>
I reserve the right to revoke or amend this designation of beneficiary by
written notice to the Fund's Secretary.
4. ACKNOWLEDGMENT OF PLAN TERMS: I have received a copy of the Security
Income Fund Non-Qualified Deferred Compensation Plan for Outside
Directors, and having read and understood the terms and conditions of the
Plan, agree to be bound thereby. I further understand that all amounts I
elect to defer pursuant to the Plan, in accordance with Paragraph 1 of
this Election Form, are subject to the claims of the creditors of the
Fund.
Date: ----------------- --------------------------------------------------
Signature - Director
Social Security Number:
---------------------------
Received By: Security Income Fund
Date: ----------------- By: ----------------------------------------------
Secretary
<PAGE>
CUSTODY AGREEMENT
DATED JANUARY 1, 1995
BETWEEN
UMB BANK, N.A.
AND
SECURITY MANAGEMENT COMPANY
FAMILY OF FUNDS
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
1. APPOINTMENT OF CUSTODIAN 1
2. DEFINITIONS 1
(a) Securities 1
(b) Assets 1
(c) Instructions and Special Instructions 1
3. DELIVERY OF CORPORATE DOCUMENTS 2
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN 3
(a) Safekeeping 3
(b) Manner of Holding Securities 4
(c) Free Delivery of Assets 6
(d) Exchange of Securities 6
(e) Purchases of Assets 6
(f) Sales of Assets 7
(g) Options 8
(h) Futures Contracts 8
(i) Segregated Accounts 9
(j) Depository Receipts 9
(k) Corporate Actions, Put Bonds, Called Bonds, Etc. 10
(l) Interest Bearing Deposits 10
(m) Foreign Exchange Transactions Other than as Principal 11
(n) Pledges or Loans of Securities 11
(o) Stock Dividends, Rights, Etc. 12
(p) Routine Dealings 12
(q) Collections 12
(r) Bank Accounts 13
(s) Dividends, Distributions and Redemptions 13
(t) Proceeds from Shares Sold 13
(u) Proxies and Notices; Compliance with the Shareholders
Communication Act of 1985 14
(v) Books and Records 14
(w) Opinion of Fund's Independent Certified Public Accountants 14
(x) Reports by Independent Certified Public Accountants 14
(y) Bills and Other Disbursements 15
<PAGE>
5. SUBCUSTODIANS 15
(a) Domestic Subcustodians 15
(b) Foreign Subcustodians 15
(c) Interim Subcustodians 16
(d) Special Subcustodians 17
(e) Termination of a Subcustodian 17
(f) Certification Regarding Foreign Subcustodians 17
6. STANDARD OF CARE 17
(a) General Standard of Care 17
(b) Actions Prohibited by Applicable Law, Events Beyond Custodian's
Control, Armed Conflict, Sovereign Risk, Etc. 18
(c) Liability for Past Records 18
(d) Advice of Counsel 18
(e) Advice of the Fund and Others 19
(f) Instructions Appearing to be Genuine 19
(g) Exceptions from Liability 19
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS 20
(a) Domestic Subcustodians 20
(b) Liability for Acts and Omissions of Foreign Subcustodians 20
(c) Securities Systems, Interim Subcustodians, Special
Subcustodians, Securities Depositories and Clearing Agencies 20
(d) Defaults or Insolvencies of Brokers, Banks, Etc. 20
(e) Reimbursement of Expenses 20
8. INDEMNIFICATION 21
(a) Indemnification by Fund 21
(b) Indemnification by Custodian 21
9. ADVANCES 21
10. LIENS 22
11. COMPENSATION 22
12. POWERS OF ATTORNEY 22
13. TERMINATION AND ASSIGNMENT 23
14. ADDITIONAL FUNDS 23
15. NOTICES 23
16. MISCELLANEOUS 24
<PAGE>
CUSTODY AGREEMENT
This agreement made as of this 1st day of January, 1995, between UMB Bank, n.a.,
a national banking association with its principal place of business located at
Kansas City, Missouri (hereinafter "Custodian"), and each of the Funds which
have executed the signature page hereof together with such additional Funds
which shall be made parties to this Agreement by the execution of a separate
signature page hereto (individually, a "Fund" and collectively, the "Funds").
WITNESSETH:
WHEREAS, each Fund is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended; and
WHEREAS, each Fund desires to appoint Custodian as its custodian for the custody
of Assets (as hereinafter defined) owned by such Fund which Assets are to be
held in such accounts as such Fund may establish from time to time; and
WHEREAS, Custodian is willing to accept such appointment on the terms and
conditions hereof.
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties hereto, intending to be legally bound, mutually covenant and agree as
follows:
1. APPOINTMENT OF CUSTODIAN.
Each Fund hereby constitutes and appoints the Custodian as custodian of
Assets belonging to each such Fund which have been or may be from time to
time deposited with the Custodian. Custodian accepts such appointment as a
custodian and agrees to perform the duties and responsibilities of
Custodian as set forth herein on the conditions set forth herein.
2. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the meanings
so indicated:
(a) "Security" or "Securities" shall mean stocks, bonds, bills, rights,
script, warrants, interim certificates and all negotiable or
nonnegotiable paper commonly known as Securities and other
instruments or obligations.
(b) "Assets" shall mean Securities, monies and other property held by
the Custodian for the benefit of a Fund.
(c)(1) "Instructions", as used herein, shall mean: (i) a tested telex, a
written (including, without limitation, facsimile transmission)
request, direction, instruction or
1
<PAGE>
certification signed or initialed by or on behalf of a Fund by an
Authorized Person; (ii) a telephonic or other oral communication
from a person the Custodian reasonably believes to be an Authorized
Person; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including,
without limitation, computers) on behalf of a Fund. Instructions in
the form of oral communications shall be confirmed by the
appropriate Fund by tested telex or in writing in the manner set
forth in clause (i) above, but the lack of such confirmation shall
in no way affect any action taken by the Custodian in reliance upon
such oral Instructions prior to the Custodian's receipt of such
confirmation. Each Fund authorizes the Custodian to record any and
all telephonic or other oral Instructions communicated to the
Custodian.
(c)(2) "Special Instructions", as used herein, shall mean Instructions
countersigned or confirmed in writing by the Treasurer or any
Assistant Treasurer of a Fund or any other person designated by the
Treasurer of such Fund in writing, which countersignature or
confirmation shall be included on the same instrument containing
the Instructions or on a separate instrument relating thereto.
(c)(3) Instructions and Special Instructions shall be delivered to the
Custodian at the address and/or telephone, facsimile transmission
or telex number agreed upon from time to time by the Custodian and
each Fund.
(c)(4) Where appropriate, Instructions and Special Instructions shall be
continuing instructions.
3. DELIVERY OF CORPORATE DOCUMENTS.
Each of the parties to this Agreement represents that its execution does
not violate any of the provisions of its respective charter, articles of
incorporation, articles of association or bylaws and all required corporate
action to authorize the execution and delivery of this Agreement has been
taken.
Each Fund has furnished the Custodian with copies, properly certified or
authenticated, with all amendments or supplements thereto, of the following
documents:
(a) Certificate of Incorporation (or equivalent document) of the Fund
as in effect on the date hereof;
(b) By-Laws of the Fund as in effect on the date hereof;
(c) Resolutions of the Board of Directors of the Fund appointing the
Custodian and approving the form of this Agreement; and
(d) The Fund's current prospectus and statements of additional
information.
2
<PAGE>
Each Fund shall promptly furnish the Custodian with copies of any updates,
amendments or supplements to the foregoing documents.
In addition, each Fund has delivered or will promptly deliver to the
Custodian, copies of the Resolution(s) of its Board of Directors or
Trustees and all amendments or supplements thereto, properly certified or
authenticated, designating certain officers or employees of each such Fund
who will have continuing authority to certify to the Custodian: (a) the
names, titles, signatures and scope of authority of all persons authorized
to give Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of each Fund, and (b) the names, titles
and signatures of those persons authorized to countersign or confirm
Special Instructions on behalf of each Fund (in both cases collectively,
the "Authorized Persons" and individually, an "Authorized Person"). Such
Resolutions and certificates may be accepted and relied upon by the
Custodian as conclusive evidence of the facts set forth therein and shall
be considered to be in full force and effect until delivery to the
Custodian of a similar Resolution or certificate to the contrary. Upon
delivery of a certificate which deletes or does not include the name(s) of
a person previously authorized to give Instructions or to countersign or
confirm Special Instructions, such persons shall no longer be considered an
Authorized Person authorized to give Instructions or to countersign or
confirm Special Instructions. Unless the certificate specifically requires
that the approval of anyone else will first have been obtained, the
Custodian will be under no obligation to inquire into the right of the
person giving such Instructions or Special Instructions to do so.
Notwithstanding any of the foregoing, no Instructions or Special
Instructions received by the Custodian from a Fund will be deemed to
authorize or permit any director, trustee, officer, employee, or agent of
such Fund to withdraw any of the Assets of such Fund upon the mere receipt
of such authorization, Special Instructions or Instructions from such
director, trustee, officer, employee or agent.
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN.
Except for Assets held by any Subcustodian appointed pursuant to Sections
5(b), (c), or (d) of this Agreement, the Custodian shall have and perform
the powers and duties hereinafter set forth in this Section 4. For purposes
of this Section 4 all references to powers and duties of the "Custodian"
shall also refer to any Domestic Subcustodian appointed pursuant to Section
5(a).
(a) SAFEKEEPING.
The Custodian will keep safely the Assets of each Fund which are
delivered to it from time to time. The Custodian shall not be
responsible for any property of a Fund held or received by such
Fund and not delivered to the Custodian.
3
<PAGE>
(b) MANNER OF HOLDING SECURITIES.
(1) The Custodian shall at all times hold Securities of each Fund
either: (i) by physical possession of the share certificates
or other instruments representing such Securities in
registered or bearer form; or (ii) in book-entry form by a
Securities System (as hereinafter defined) in accordance with
the provisions of sub-paragraph (3) below.
(2) The Custodian may hold registrable portfolio Securities which
have been delivered to it in physical form, by registering the
same in the name of the appropriate Fund or its nominee, or in
the name of the Custodian or its nominee, for whose actions
such Fund and Custodian, respectively, shall be fully
responsible. Upon the receipt of Instructions, the Custodian
shall hold such Securities in street certificate form, so
called, with or without any indication of fiduciary capacity.
However, unless it receives Instructions to the contrary, the
Custodian will register all such portfolio Securities in the
name of the Custodian's authorized nominee. All such
Securities shall be held in an account of the Custodian
containing only assets of the appropriate Fund or only assets
held by the Custodian as a fiduciary, provided that the
records of the Custodian shall indicate at all times the Fund
or other customer for which such Securities are held in such
accounts and the respective interests therein.
(3) The Custodian may deposit and/or maintain domestic Securities
owned by a Fund in, and each Fund hereby approves use of: (a)
The Depository Trust Company; (b) The Participants Trust
Company; and (c) any book-entry system as provided in (i)
Subpart 0 of Treasury Circular No. 300, 31 CFR 306.115, (ii)
Subpart B of Treasury Circular Public Debt Series No. 27-76,
31 CFR 350.2, or (iii) the book-entry regulations of federal
agencies substantially in the form of 31 CFR 306.115. Upon the
receipt of Special Instructions, the Custodian may deposit
and/or maintain domestic Securities owned by a Fund in any
other domestic clearing agency registered with the Securities
and Exchange Commission ("SEC") under Section 17A of the
Securities Exchange Act of 1934 (or as may otherwise be
authorized by the SEC to serve in the capacity of depository
or clearing agent for the Securities or other assets of
investment companies) which acts as a Securities depository.
Each of the foregoing shall be referred to in this Agreement
as a "Securities System", and all such Securities Systems
shall be listed on the attached Appendix A. Use of a
Securities System shall be in accordance with applicable
Federal Reserve Board and SEC rules and regulations, if any,
and subject to the following provisions:
(i) The Custodian may deposit the Securities directly or
through one or more agents or Subcustodians which are
also qualified to act as custodians for investment
companies.
4
<PAGE>
(ii) The Custodian shall deposit and/or maintain the
Securities in a Securities System, provided that such
Securities are represented in an account ("Account") of
the Custodian in the Securities System that includes
only assets held by the Custodian as a fiduciary,
custodian or otherwise for customers.
(iii) The books and records of the Custodian shall at all
times identify those Securities belonging to any one or
more Funds which are maintained in a Securities System.
(iv) The Custodian shall pay for Securities purchased for
the account of a Fund only upon (a) receipt of advice
from the Securities System that such Securities have
been transferred to the Account of the Custodian in
accordance with the rules of the Securities System, and
(b) the making of an entry on the records of the
Custodian to reflect such payment and transfer for the
account of such Fund. The Custodian shall transfer
Securities sold for the account of a Fund only upon (a)
receipt of advice from the Securities System that
payment for such Securities has been transferred to the
Account of the Custodian in accordance with the rules
of the Securities System, and (b) the making of an
entry on the records of the Custodian to reflect such
transfer and payment for the account of such Fund.
Copies of all advices from the Securities System
relating to transfers of Securities for the account of
a Fund shall be maintained for such Fund by the
Custodian. The Custodian shall deliver to a Fund on the
next succeeding business day daily transaction reports
which shall include each day's transactions in the
Securities System for the account of such Fund. Such
transaction reports shall be delivered to such Fund or
any agent designated by such Fund pursuant to
Instructions, by computer or in such other manner as
such Fund and Custodian may agree.
(v) The Custodian shall, if requested by a Fund pursuant to
Instructions, provide such Fund with reports obtained
by the Custodian or any Subcustodian with respect to a
Securities System's accounting system, internal
accounting control and procedures for safeguarding
Securities deposited in the Securities System.
(vi) Upon receipt of Special Instructions, the Custodian
shall terminate the use of any Securities System on
behalf of a Fund as promptly as practicable and shall
take all actions reasonably practicable to safeguard
the Securities of such Fund maintained with such
Securities System.
5
<PAGE>
(c) FREE DELIVERY OF ASSETS.
Notwithstanding any other provision of this Agreement and except as
provided in Section 3 hereof, the Custodian, upon receipt of
Special Instructions, will undertake to make free delivery of
Assets, provided such Assets are on hand and available, in
connection with a Fund's transactions and to transfer such Assets
to such broker, dealer, Subcustodian, bank, agent, Securities
System or otherwise as specified in such Special Instructions.
(d) EXCHANGE OF SECURITIES.
Upon receipt of Instructions, the Custodian will exchange portfolio
Securities held by it for a Fund for other Securities or cash paid
in connection with any reorganization, recapitalization, merger,
consolidation, or conversion of convertible Securities, and will
deposit any such Securities in accordance with the terms of any
reorganization or protective plan.
Without Instructions, the Custodian is authorized to exchange
Securities held by it in temporary form for Securities in
definitive form, to surrender Securities for transfer into a name
or nominee name as permitted in Section 4(b)(2), to effect an
exchange of shares in a stock split or when the par value of the
stock is changed, to sell any fractional shares, and, upon
receiving payment therefor, to surrender bonds or other Securities
held by it at maturity or call.
(e) PURCHASE OF ASSETS.
(1) SECURITIES PURCHASES. In accordance with Instructions, the
Custodian shall, with respect to a purchase of Securities, pay
for such Securities out of monies held for a Fund's account
for which the purchase was made, but only insofar as monies
are available therein for such purpose, and receive the
portfolio Securities so purchased. Unless the Custodian has
received Special Instructions to the contrary, such payment
will be made only upon receipt of Securities by the Custodian,
a clearing corporation of a national Securities exchange of
which the Custodian is a member, or a Securities System in
accordance with the provisions of Section 4(b)(3) hereof.
Notwithstanding the foregoing, upon receipt of Instructions:
(i) in connection with a repurchase agreement, the Custodian
may release funds to a Securities System prior to the receipt
of advice from the Securities System that the Securities
underlying such repurchase agreement have been transferred by
book-entry into the Account maintained with such Securities
System by the Custodian, provided that the Custodian's
instructions to the Securities System require that the
Securities System may make payment of such funds to the other
party to the repurchase agreement only upon transfer by
book-entry of the Securities underlying the repurchase
agreement into such Account; (ii) in the case of Interest
Bearing Deposits, currency deposits, and
6
<PAGE>
other deposits, foreign exchange transactions, futures
contracts or options, pursuant to Sections 4(g), 4(h), 4(1),
and 4(m) hereof, the Custodian may make payment therefor
before receipt of an advice of transaction; and (iii) in the
case of Securities as to which payment for the Security and
receipt of the instrument evidencing the Security are under
generally accepted trade practice or the terms of the
instrument representing the Security expected to take place in
different locations or through separate parties, such as
commercial paper which is indexed to foreign currency exchange
rates, derivatives and similar Securities, the Custodian may
make payment for such Securities prior to delivery thereof in
accordance with such generally accepted trade practice or the
terms of the instrument representing such Security.
(2) OTHER ASSETS PURCHASED. Upon receipt of Instructions and
except as otherwise provided herein, the Custodian shall pay
for and receive other Assets for the account of a Fund as
provided in Instructions.
(f) SALES OF ASSETS.
(1) SECURITIES SOLD. In accordance with Instructions, the
Custodian will, with respect to a sale, deliver or cause to be
delivered the Securities thus designated as sold to the broker
or other person specified in the Instructions relating to such
sale. Unless the Custodian has received Special Instructions
to the contrary, such delivery shall be made only upon receipt
of payment therefor in the form of: (a) cash, certified check,
bank cashier's check, bank credit, or bank wire transfer; (b)
credit to the account of the Custodian with a clearing
corporation of a national Securities exchange of which the
Custodian is a member; or (c) credit to the Account of the
Custodian with a Securities System, in accordance with the
provisions of Section 4(b)(3) hereof. Notwithstanding the
foregoing, Securities held in physical form may be delivered
and paid for in accordance with "street delivery custom" to a
broker or its clearing agent, against delivery to the
Custodian of a receipt for such Securities, provided that the
Custodian shall have taken reasonable steps to ensure prompt
collection of the payment for, or return of, such Securities
by the broker or its clearing agent, and provided further that
the Custodian shall not be responsible for the selection of or
the failure or inability to perform of such broker or its
clearing agent or for any related loss arising from delivery
or custody of such Securities prior to receiving payment
therefor.
(2) OTHER ASSETS SOLD. Upon receipt of Instructions and except as
otherwise provided herein, the Custodian shall receive payment
for and deliver other Assets for the account of a Fund as
provided in Instructions.
7
<PAGE>
(g) OPTIONS.
(1) Upon receipt of Instructions relating to the purchase of an
option or sale of a covered call option, the Custodian shall:
(a) receive and retain confirmations or other documents, if
any, evidencing the purchase or writing of the option by a
Fund; (b) if the transaction involves the sale of a covered
call option, deposit and maintain in a segregated account the
Securities (either physically or by book-entry in a Securities
System) subject to the covered call option written on behalf
of such Fund; and (c) pay, release and/or transfer such
Securities, cash or other Assets in accordance with any
notices or other communications evidencing the expiration,
termination or exercise of such options which are furnished to
the Custodian by the Options Clearing Corporation (the "OCC"),
the securities or options exchanges on which such options were
traded, or such other organization as may be responsible for
handling such option transactions.
(2) Upon receipt of Instructions relating to the sale of a naked
option (including stock index and commodity options), the
Custodian, the appropriate Fund and the broker-dealer shall
enter into an agreement to comply with the rules of the OCC or
of any registered national securities exchange or similar
organizations(s). Pursuant to that agreement and such Fund's
Instructions, the Custodian shall: (a) receive and retain
confirmations or other documents, if any, evidencing the
writing of the option; (b) deposit and maintain in a
segregated account, Securities (either physically or by
book-entry in a Securities System), cash and/or other Assets;
and (c) pay, release and/or transfer such Securities, cash or
other Assets in accordance with any such agreement and with
any notices or other communications evidencing the expiration,
termination or exercise of such option which are furnished to
the Custodian by the OCC, the securities or options exchanges
on which such options were traded, or such other organization
as may be responsible for handling such option transactions.
The appropriate Fund and the broker-dealer shall be
responsible for determining the quality and quantity of assets
held in any segregated account established in compliance with
applicable margin maintenance requirements and the performance
of other terms of any option contract.
(h) FUTURES CONTRACTS.
Upon receipt of Instructions, the Custodian shall enter into a
futures margin procedural agreement among the appropriate Fund, the
Custodian and the designated futures commission merchant (a
"Procedural Agreement"). Under the Procedural Agreement the
Custodian shall: (a) receive and retain confirmations, if any,
evidencing the purchase or sale of a futures contract or an option
on a futures contract by such Fund; (b) deposit and maintain in a
segregated account cash, Securities and/or other Assets designated
as initial, maintenance or variation
8
<PAGE>
"margin" deposits intended to secure such Fund's performance of its
obligations under any futures contracts purchased or sold, or any
options on futures contracts written by such Fund, in accordance
with the provisions of any Procedural Agreement designed to comply
with the provisions of the Commodity Futures Trading Commission
and/or any commodity exchange or contract market (such as the
Chicago Board of Trade), or any similar organization(s), regarding
such margin deposits; and (c) release Assets from and/or transfer
Assets into such margin accounts only in accordance with any such
Procedural Agreements. The appropriate Fund and such futures
commission merchant shall be responsible for determining the type
and amount of Assets held in the segregated account or paid to the
broker-dealer in compliance with applicable margin maintenance
requirements and the performance of any futures contract or option
on a futures contract in accordance with its terms.
(i) SEGREGATED ACCOUNTS.
Upon receipt of Instructions, the Custodian shall establish and
maintain on its books a segregated account or accounts for and on
behalf of a Fund, into which account or accounts may be transferred
Assets of such Fund, including Securities maintained by the
Custodian in a Securities System pursuant to Paragraph (b)(3) of
this Section 4, said account or accounts to be maintained (i) for
the purposes set forth in Sections 4(g), 4(h) and 4(n) and (ii) for
the purpose of compliance by such Fund with the procedures required
by the SEC Investment Company Act Release Number 10666 or any
subsequent release or releases relating to the maintenance of
segregated accounts by registered investment companies, or (iii)
for such other purposes as may be set forth, from time to time, in
Special Instructions. The Custodian shall not be responsible for
the determination of the type or amount of Assets to be held in any
segregated account referred to in this paragraph, or for compliance
by the Fund with required procedures noted in (ii) above.
(j) DEPOSITORY RECEIPTS.
Upon receipt of Instructions, the Custodian shall surrender or
cause to be surrendered Securities to the depositary used for such
Securities by an issuer of American Depositary Receipts or
International Depositary Receipts (hereinafter referred to,
collectively, as "ADRs"), against a written receipt therefor
adequately describing such Securities and written evidence
satisfactory to the organization surrendering the same that the
depositary has acknowledged receipt of instructions to issue ADRs
with respect to such Securities in the name of the Custodian or a
nominee of the Custodian, for delivery in accordance with such
instructions.
Upon receipt of Instructions, the Custodian shall surrender or
cause to be surrendered ADRs to the issuer thereof, against a
written receipt therefor adequately describing the ADRs surrendered
and written evidence satisfactory to the organization surrendering
the same that the issuer of the ADRs has
9
<PAGE>
acknowledged receipt of instructions to cause its depository to
deliver the Securities underlying such ADRs in accordance with such
instructions.
(k) CORPORATE ACTIONS, PUT BONDS, CALLED BONDS, ETC.
Upon receipt of Instructions, the Custodian shall: (a) deliver
warrants, puts, calls, rights or similar Securities to the issuer
or trustee thereof (or to the agent of such issuer or trustee) for
the purpose of exercise or sale, provided that the new Securities,
cash or other Assets, if any, acquired as a result of such actions
are to be delivered to the Custodian; and (b) deposit Securities
upon invitations for tenders thereof, provided that the
consideration for such Securities is to be paid or delivered to the
Custodian, or the tendered Securities are to be returned to the
Custodian.
Notwithstanding any provision of this Agreement to the contrary,
the Custodian shall take all necessary action, unless otherwise
directed to the contrary in Instructions, to comply with the terms
of all mandatory or compulsory exchanges, calls, tenders,
redemptions, or similar rights of security ownership, and shall
notify the appropriate Fund of such action in writing by facsimile
transmission or in such other manner as such Fund and Custodian may
agree in writing.
The Fund agrees that if it gives an Instruction for the performance
of an act on the last permissible date of a period established by
any optional offer or on the last permissible date for the
performance of such act, the Fund shall hold the Bank harmless from
any adverse consequences in connection with acting upon or failing
to act upon such Instructions.
(l) INTEREST BEARING DEPOSITS.
Upon receipt of Instructions directing the Custodian to purchase
interest bearing fixed term and call deposits (hereinafter referred
to, collectively, as "Interest Bearing Deposits") for the account
of a Fund, the Custodian shall purchase such Interest Bearing
Deposits in the name of such Fund with such banks or trust
companies, including the Custodian, any Subcustodian or any
subsidiary or affiliate of the Custodian (hereinafter referred to
as "Banking Institutions"), and in such amounts as such Fund may
direct pursuant to Instructions. Such Interest Bearing Deposits may
be denominated in U.S. dollars or other currencies, as such Fund
may determine and direct pursuant to Instructions. The
responsibilities of the Custodian to a Fund for Interest Bearing
Deposits issued by the Custodian shall be that of a U.S. bank for a
similar deposit. With respect to Interest Bearing Deposits other
than those issued by the Custodian, (a) the Custodian shall be
responsible for the collection of income and the transmission of
cash to and from such accounts; and (b) the Custodian shall have no
duty with respect to the selection of the Banking Institution or
for the failure of such Banking Institution to pay upon demand.
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(m) FOREIGN EXCHANGE TRANSACTIONS OTHER THAN AS PRINCIPAL.
(1) Upon receipt of Instructions, the Custodian shall settle
foreign exchange contracts or options to purchase and sell
foreign currencies for spot and future delivery on behalf of
and for the account of a Fund with such currency brokers or
Banking Institutions as such Fund may determine and direct
pursuant to Instructions. Each Fund accepts full
responsibility for its use of third party foreign exchange
brokers and for execution of said foreign exchange contracts
and understands that the Fund shall be responsible for any and
all costs and interest charges which may be incurred as a
result of the failure or delay of its third party broker to
deliver foreign exchange. The Custodian shall have no
responsibility with respect to the selection of the currency
brokers or Banking Institutions with which a Fund deals or, so
long as the Custodian acts in accordance with Instructions,
for the failure of such brokers or Banking Institutions to
comply with the terms of any contract or option.
(2) Notwithstanding anything to the contrary contained herein,
upon receipt of Instructions the Custodian may, in connection
with a foreign exchange contract, make free outgoing payments
of cash in the form of U.S. Dollars or foreign currency prior
to receipt of confirmation of such foreign exchange contract
or confirmation that the countervalue currency completing such
contract has been delivered or received.
(n) PLEDGES OR LOANS OF SECURITIES.
(1) Upon receipt of Instructions from a Fund, the Custodian will
release or cause to be released Securities held in custody to
the pledgees designated in such Instructions by way of pledge
or hypothecation to secure loans incurred by such Fund with
various lenders including but not limited to UMB Bank, n.a.;
provided, however, that the Securities shall be released only
upon payment to the Custodian of the monies borrowed, except
that in cases where additional collateral is required to
secure existing borrowings, further Securities may be released
or delivered, or caused to be released or delivered for that
purpose upon receipt of Instructions. Upon receipt of
Instructions, the Custodian will pay, but only from funds
available for such purpose, any such loan upon re-delivery to
it of the Securities pledged or hypothecated therefor and upon
surrender of the note or notes evidencing such loan. In lieu
of delivering collateral to a pledgee, the Custodian, on the
receipt of Instructions, shall transfer the pledged Securities
to a segregated account for the benefit of the pledgee.
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(2) Upon receipt of Special Instructions, and execution of a
separate Securities Lending Agreement, the Custodian will
release Securities held in custody to the borrower designated
in such Instructions and may, except as otherwise provided
below, deliver such Securities prior to the receipt of
collateral, if any, for such borrowing, provided that, in case
of loans of Securities held by a Securities System that are
secured by cash collateral, the Custodian's instructions to
the Securities System shall require that the Securities System
deliver the Securities of the appropriate Fund to the borrower
thereof only upon receipt of the collateral for such
borrowing. The Custodian shall have no responsibility or
liability for any loss arising from the delivery of Securities
prior to the receipt of collateral. Upon receipt of
Instructions and the loaned Securities, the Custodian will
release the collateral to the borrower.
(o) STOCK DIVIDENDS, RIGHTS, ETC.
The Custodian shall receive and collect all stock dividends,
rights, and other items of like nature and, upon receipt of
Instructions, take action with respect to the same as directed in
such Instructions.
(p) ROUTINE DEALINGS.
The Custodian will, in general, attend to all routine and
mechanical matters in accordance with industry standards in
connection with the sale, exchange, substitution, purchase,
transfer, or other dealings with Securities or other property of
each Fund except as may be otherwise provided in this Agreement or
directed from time to time by Instructions from any particular
Fund. The Custodian may also make payments to itself or others from
the Assets for disbursements and out-of-pocket expenses incidental
to handling Securities or other similar items relating to its
duties under this Agreement, provided that all such payments shall
be accounted for to the appropriate Fund.
(q) COLLECTIONS.
The Custodian shall (a) collect amounts due and payable to each
Fund with respect to portfolio Securities and other Assets; (b)
promptly credit to the account of each Fund all income and other
payments relating to portfolio Securities and other Assets held by
the Custodian hereunder upon Custodian's receipt of such income or
payments or as otherwise agreed in writing by the Custodian and any
particular Fund; (c) promptly endorse and deliver any instruments
required to effect such collection; and (d) promptly execute
ownership and other certificates and affidavits for all federal,
state, local and foreign tax purposes in connection with receipt of
income or other payments with respect to portfolio Securities and
other Assets, or in connection with the transfer of such Securities
or other Assets; provided, however, that with respect to portfolio
Securities registered in so-called street name, or physical
Securities with variable interest rates, the Custodian shall use
its
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best efforts to collect amounts due and payable to any such Fund.
The Custodian shall notify a Fund in writing by facsimile
transmission or in such other manner as such Fund and Custodian may
agree in writing if any amount payable with respect to portfolio
Securities or other Assets is not received by the Custodian when
due. The Custodian shall not be responsible for the collection of
amounts due and payable with respect to portfolio Securities or
other Assets that are in default.
(r) BANK ACCOUNTS.
Upon Instructions, the Custodian shall open and operate a bank
account or accounts on the books of the Custodian; provided that
such bank account(s) shall be in the name of the Custodian or a
nominee thereof, for the account of one or more Funds, and shall be
subject only to draft or order of the Custodian. The
responsibilities of the Custodian to any one or more such Funds for
deposits accepted on the Custodian's books shall be that of a U.S.
bank for a similar deposit.
(s) DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS.
To enable each Fund to pay dividends or other distributions to
shareholders of each such Fund and to make payment to shareholders
who have requested repurchase or redemption of their shares of each
such Fund (collectively, the "Shares"), the Custodian shall release
cash or Securities insofar as available. In the case of cash, the
Custodian shall, upon the receipt of Instructions, transfer such
funds by check or wire transfer to any account at any bank or trust
company designated by each such Fund in such Instructions. In the
case of Securities, the Custodian shall, upon the receipt of
Special Instructions, make such transfer to any entity or account
designated by each such Fund in such Special Instructions.
(t) PROCEEDS FROM SHARES SOLD.
The Custodian shall receive funds representing cash payments
received for shares issued or sold from time to time by each Fund,
and shall credit such funds to the account of the appropriate Fund.
The Custodian shall notify the appropriate Fund of Custodian's
receipt of cash in payment for shares issued by such Fund by
facsimile transmission or in such other manner as such Fund and the
Custodian shall agree. Upon receipt of Instructions, the Custodian
shall: (a) deliver all federal funds received by the Custodian in
payment for shares as may be set forth in such Instructions and at
a time agreed upon between the Custodian and such Fund; and (b)
make federal funds available to a Fund as of specified times agreed
upon from time to time by such Fund and the Custodian, in the
amount of checks received in payment for shares which are deposited
to the accounts of such Fund.
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(u) PROXIES AND NOTICES; COMPLIANCE WITH THE SHAREHOLDERS COMMUNICATION
ACT OF 1985.
The Custodian shall deliver or cause to be delivered to the
appropriate Fund all forms of proxies, all notices of meetings, and
any other notices or announcements affecting or relating to
Securities owned by such Fund that are received by the Custodian,
any Subcustodian, or any nominee of either of them, and, upon
receipt of Instructions, the Custodian shall execute and deliver,
or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as
directed pursuant to Instructions, neither the Custodian nor any
Subcustodian or nominee shall vote upon any such Securities, or
execute any proxy to vote thereon, or give any consent or take any
other action with respect thereto.
The Custodian will not release the identity of any Fund to an
issuer which requests such information pursuant to the Shareholder
Communications Act of 1985 for the specific purpose of direct
communications between such issuer and any such Fund unless a
particular Fund directs the Custodian otherwise in writing.
(v) BOOKS AND RECORDS.
The Custodian shall maintain such records relating to its
activities under this Agreement as are required to be maintained by
Rule 31a-1 under the Investment Company Act of 1940 ("the 1940
Act") and to preserve them for the periods prescribed in Rule 31a-2
under the 1940 Act. These records shall be open for inspection by
duly authorized officers, employees or agents (including
independent public accountants) of the appropriate Fund during
normal business hours of the Custodian.
The Custodian shall provide accountings relating to its activities
under this Agreement as shall be agreed upon by each Fund and the
Custodian.
(w) OPINION OF FUND'S INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
The Custodian shall take all reasonable action as each Fund may
request to obtain from year to year favorable opinions from each
such Fund's independent certified public accountants with respect
to the Custodian's activities hereunder and in connection with the
preparation of each such Fund's periodic reports to the SEC and
with respect to any other requirements of the SEC.
(x) REPORTS BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
At the request of a Fund, the Custodian shall deliver to such Fund
a written report prepared by the Custodian's independent certified
public accountants with respect to the services provided by the
Custodian under this Agreement, including, without
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limitation, the Custodian's accounting system, internal accounting
control and procedures for safeguarding cash, Securities and other
Assets, including cash, Securities and other Assets deposited
and/or maintained in a Securities System or with a Subcustodian.
Such report shall be of sufficient scope and in sufficient detail
as may reasonably be required by such Fund and as may reasonably be
obtained by the Custodian.
(y) BILLS AND OTHER DISBURSEMENTS.
Upon receipt of Instructions, the Custodian shall pay, or cause to
be paid, all bills, statements, or other obligations of a Fund.
5. SUBCUSTODIANS.
From time to time, in accordance with the relevant provisions of this
Agreement, the Custodian may appoint one or more Domestic Subcustodians,
Foreign Subcustodians, Special Subcustodians, or Interim Subcustodians (as
each are hereinafter defined) to act on behalf of any one or more Funds. A
Domestic Subcustodian, in accordance with the provisions of this Agreement,
may also appoint a Foreign Subcustodian, Special Subcustodian, or Interim
Subcustodian to act on behalf of any one or more Funds. For purposes of
this Agreement, all Domestic Subcustodians, Foreign Subcustodians, Special
Subcustodians and Interim Subcustodians shall be referred to collectively
as "Subcustodians".
(a) DOMESTIC SUBCUSTODIANS.
The Custodian may, at any time and from time to time, appoint any
bank as defined in Section 2(a)(5) of the 1940 Act or any trust
company or other entity, any of which meet the requirements of a
custodian under Section 17(f) of the 1940 Act and the rules and
regulations thereunder, to act for the Custodian on behalf of any
one or more Funds as a subcustodian for purposes of holding Assets
of such Fund(s) and performing other functions of the Custodian
within the United States (a "Domestic Subcustodian"). Each Fund
shall approve in writing the appointment of the proposed Domestic
Subcustodian; and the Custodian's appointment of any such Domestic
Subcustodian shall not be effective without such prior written
approval of the Fund(s). Each such duly approved Domestic
Subcustodian shall be listed on Appendix A attached hereto, as it
may be amended, from time to time.
(b) FOREIGN SUBCUSTODIANS.
The Custodian may at any time appoint, or cause a Domestic
Subcustodian to appoint, any bank, trust company or other entity
meeting the requirements of an "eligible foreign custodian" under
Section 17(f) of the 1940 Act and the rules and regulations
thereunder to act for the Custodian on behalf of any one or more
Funds as a subcustodian or sub-subcustodian (if appointed by a
Domestic Subcustodian)
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for purposes of holding Assets of the Fund(s) and performing other
functions of the Custodian in countries other than the United
States of America (hereinafter referred to as a "Foreign
Subcustodian" in the context of either a subcustodian or a
sub-subcustodian); provided that the Custodian shall have obtained
written confirmation from each Fund of the approval of the Board of
Directors or other governing body of each such Fund (which approval
may be withheld in the sole discretion of such Board of Directors
or other governing body or entity) with respect to (i) the identity
of any proposed Foreign Subcustodian (including branch
designation), (ii) the country or countries in which, and the
securities depositories or clearing agencies (hereinafter
"Securities Depositories and Clearing Agencies"), if any, through
which, the Custodian or any proposed Foreign Subcustodian is
authorized to hold Securities and other Assets of each such Fund,
and (iii) the form and terms of the subcustodian agreement to be
entered into with such proposed Foreign Subcustodian. Each such
duly approved Foreign Subcustodian and the countries where and the
Securities Depositories and Clearing Agencies through which they
may hold Securities and other Assets of the Fund(s) shall be listed
on Appendix A attached hereto, as it may be amended, from time to
time. Each Fund shall be responsible for informing the Custodian
sufficiently in advance of a proposed investment which is to be
held in a country in which no Foreign Subcustodian is authorized to
act, in order that there shall be sufficient time for the
Custodian, or any Domestic Subcustodian, to effect the appropriate
arrangements with a proposed Foreign Subcustodian, including
obtaining approval as provided in this Section 5(b). In connection
with the appointment of any Foreign Subcustodian, the Custodian
shall, or shall cause the Domestic Subcustodian to, enter into a
subcustodian agreement with the Foreign Subcustodian in form and
substance approved by each such Fund. The Custodian shall not
consent to the amendment of, and shall cause any Domestic
Subcustodian not to consent to the amendment of, any agreement
entered into with a Foreign Subcustodian, which materially affects
any Fund's rights under such agreement, except upon prior written
approval of such Fund pursuant to Special Instructions.
(c) INTERIM SUBCUSTODIANS.
Notwithstanding the foregoing, in the event that a Fund shall
invest in an Asset to be held in a country in which no Foreign
Subcustodian is authorized to act, the Custodian shall notify such
Fund in writing by facsimile transmission or in such other manner
as such Fund and the Custodian shall agree in writing of the
unavailability of an approved Foreign Subcustodian in such country;
and upon the receipt of Special Instructions from such Fund, the
Custodian shall, or shall cause its Domestic Subcustodian to,
appoint or approve an entity (referred to herein as an "Interim
Subcustodian") designated in such Special Instructions to hold such
Security or other Asset.
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(d) SPECIAL SUBCUSTODIANS.
Upon receipt of Special Instructions, the Custodian shall on behalf
of a Fund, appoint one or more banks, trust companies or other
entities designated in such Special Instructions to act for the
Custodian on behalf of such Fund as a subcustodian for purposes of:
(i) effecting third-party repurchase transactions with banks,
brokers, dealers or other entities through the use of a common
custodian or subcustodian; (ii) providing depository and clearing
agency services with respect to certain variable rate demand note
Securities, (iii) providing depository and clearing agency services
with respect to dollar denominated Securities, and (iv) effecting
any other transactions designated by such Fund in such Special
Instructions. Each such designated subcustodian (hereinafter
referred to as a "Special Subcustodian") shall be listed on
Appendix A attached hereto, as it may be amended from time to time.
In connection with the appointment of any Special Subcustodian, the
Custodian shall enter into a subcustodian agreement with the
Special Subcustodian in form and substance approved by the
appropriate Fund in Special Instructions. The Custodian shall not
amend any subcustodian agreement entered into with a Special
Subcustodian, or waive any rights under such agreement, except upon
prior approval pursuant to Special Instructions.
(e) TERMINATION OF A SUBCUSTODIAN.
The Custodian may, at any time in its discretion upon notification
to the appropriate Fund(s), terminate any Subcustodian of such
Fund(s) in accordance with the termination provisions under the
applicable subcustodian agreement, and upon the receipt of Special
Instructions, the Custodian will terminate any Subcustodian in
accordance with the termination provisions under the applicable
subcustodian agreement.
(f) CERTIFICATION REGARDING FOREIGN SUBCUSTODIANS.
Upon request of a Fund, the Custodian shall deliver to such Fund a
certificate stating: (i) the identity of each Foreign Subcustodian
then acting on behalf of the Custodian; (ii) the countries in which
and the Securities Depositories and Clearing Agencies through which
each such Foreign Subcustodian is then holding cash, Securities and
other Assets of such Fund; and (iii) such other information as may
be requested by such Fund, and as the Custodian shall be reasonably
able to obtain, to evidence compliance with rules and regulations
under the 1940 Act.
6. STANDARD OF CARE.
(a) GENERAL STANDARD OF CARE.
The Custodian shall be liable to a Fund for all losses, damages and
reasonable costs and expenses suffered or incurred by such Fund
resulting from the gross
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negligence or willful misfeasance of the Custodian; provided,
however, in no event shall the Custodian be liable for special,
indirect or consequential damages arising under or in connection
with this Agreement.
(b) ACTIONS PROHIBITED BY APPLICABLE LAW, EVENTS BEYOND CUSTODIAN'S
CONTROL, SOVEREIGN RISK, ETC.
In no event shall the Custodian or any Domestic Subcustodian incur
liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities System,
Securities Depository or Clearing Agency utilized by the Custodian
or any such Subcustodian, or any nominee of the Custodian or any
Subcustodian (individually, a "Person") is prevented, forbidden or
delayed from performing, or omits to perform, any act or thing
which this Agreement provides shall be performed or omitted to be
performed, by reason of: (i) any provision of any present or future
law or regulation or order of the United States of America, or any
state thereof, or of any foreign country, or political subdivision
thereof or of any court of competent jurisdiction (and neither the
Custodian nor any other Person shall be obligated to take any
action contrary thereto); or (ii) any event beyond the control of
the Custodian or other Person such as armed conflict, riots,
strikes, lockouts, labor disputes, equipment or transmission
failures, natural disasters, or failure of the mails,
transportation, communications or power supply; or (iii) any
"Sovereign Risk." A "Sovereign Risk" shall mean nationalization,
expropriation, devaluation, revaluation, confiscation, seizure,
cancellation, destruction or similar action by any governmental
authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of
currency restrictions, exchange controls, taxes, levies or other
charges affecting a Fund's Assets; or acts of armed conflict,
terrorism, insurrection or revolution; or any other act or event
beyond the Custodian's or such other Person's control.
(c) LIABILITY FOR PAST RECORDS.
Neither the Custodian nor any Domestic Subcustodian shall have any
liability in respect of any loss, damage or expense suffered by a
Fund, insofar as such loss, damage or expense arises from the
performance of the Custodian or any Domestic Subcustodian in
reliance upon records that were maintained for such Fund by
entities other than the Custodian or any Domestic Subcustodian
prior to the Custodian's employment hereunder.
(d) ADVICE OF COUNSEL.
The Custodian and all Domestic Subcustodians shall be entitled to
receive and act upon advice of counsel of its own choosing on all
matters. The Custodian and all Domestic Subcustodians shall be
without liability for any actions taken or omitted in good faith
pursuant to the advice of counsel.
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(e) ADVICE OF THE FUND AND OTHERS.
The Custodian and any Domestic Subcustodian may rely upon the
advice of any Fund and upon statements of such Fund's accountants
and other persons believed by it in good faith to be expert in
matters upon which they are consulted, and neither the Custodian
nor any Domestic Subcustodian shall be liable for any actions taken
or omitted, in good faith, pursuant to such advice or statements.
(f) INSTRUCTIONS APPEARING TO BE GENUINE.
The Custodian and all Domestic Subcustodians shall be fully
protected and indemnified in acting as a custodian hereunder upon
any Resolutions of the Board of Directors or Trustees,
Instructions, Special Instructions, advice, notice, request,
consent, certificate, instrument or paper appearing to it to be
genuine and to have been properly executed and shall, unless
otherwise specifically provided herein, be entitled to receive as
conclusive proof of any fact or matter required to be ascertained
from any Fund hereunder a certificate signed by any officer of such
Fund authorized to countersign or confirm Special Instructions.
(g) EXCEPTIONS FROM LIABILITY.
Without limiting the generality of any other provisions hereof,
neither the Custodian nor any Domestic Subcustodian shall be under
any duty or obligation to inquire into, nor be liable for:
(i) the validity of the issue of any Securities purchased by or
for any Fund, the legality of the purchase thereof or
evidence of ownership required to be received by any such
Fund, or the propriety of the decision to purchase or amount
paid therefor;
(ii) the legality of the sale of any Securities by or for any
Fund, or the propriety of the amount for which the same were
sold; or
(iii) any other expenditures, encumbrances of Securities,
borrowings or similar actions with respect to any Fund's
Assets;
and may, until notified to the contrary, presume that all
Instructions or Special Instructions received by it are not in
conflict with or in any way contrary to any provisions of any such
Fund's Declaration of Trust, Partnership Agreement, Articles of
Incorporation or By-Laws or votes or proceedings of the
shareholders, trustees, partners or directors of any such Fund, or
any such Fund's currently effective Registration Statement on file
with the SEC.
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7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS.
(a) DOMESTIC SUBCUSTODIANS
The Custodian shall be liable for the acts or omissions of any
Domestic Subcustodian to the same extent as if such actions or
omissions were performed by the Custodian itself.
(b) LIABILITY FOR ACTS AND OMISSIONS OF FOREIGN SUBCUSTODIANS.
The Custodian shall be liable to a Fund for any loss or damage to
such Fund caused by or resulting from the acts or omissions of any
Foreign Subcustodian to the extent that, under the terms set forth
in the subcustodian agreement between the Custodian or a Domestic
Subcustodian and such Foreign Subcustodian, the Foreign
Subcustodian has failed to perform in accordance with the standard
of conduct imposed under such subcustodian agreement and the
Custodian or Domestic Subcustodian recovers from the Foreign
Subcustodian under the applicable subcustodian agreement.
(c) SECURITIES SYSTEMS, INTERIM SUBCUSTODIANS, SPECIAL SUBCUSTODIANS,
SECURITIES DEPOSITORIES AND CLEARING AGENCIES.
The Custodian shall not be liable to any Fund for any loss, damage
or expense suffered or incurred by such Fund resulting from or
occasioned by the actions or omissions of a Securities System,
Interim Subcustodian, Special Subcustodian, or Securities
Depository and Clearing Agency unless such loss, damage or expense
is caused by, or results from, the gross negligence or willful
misfeasance of the Custodian.
(d) DEFAULTS OR INSOLVENCIES OF BROKERS, BANKS, ETC.
The Custodian shall not be liable for any loss, damage or expense
suffered or incurred by any Fund resulting from or occasioned by
the actions, omissions, neglects, defaults or insolvency of any
broker, bank, trust company or any other person with whom the
Custodian may deal (other than any of such entities acting as a
Subcustodian, Securities System or Securities Depository and
Clearing Agency, for whose actions the liability of the Custodian
is set out elsewhere in this Agreement) unless such loss, damage or
expense is caused by, or results from, the gross negligence or
willful misfeasance of the Custodian.
(e) REIMBURSEMENT OF EXPENSES.
Each Fund agrees to reimburse the Custodian for all out-of-pocket
expenses incurred by the Custodian in connection with this
Agreement, but excluding salaries and usual overhead expenses.
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8. INDEMNIFICATION.
(a) INDEMNIFICATION BY FUND.
Subject to the limitations set forth in this Agreement, each Fund
agrees to indemnify and hold harmless the Custodian and its
nominees from all losses, damages and expenses (including
attorneys' fees) suffered or incurred by the Custodian or its
nominee caused by or arising from actions taken by the Custodian,
its employees or agents in the performance of its duties and
obligations under this Agreement, including, but not limited to,
any indemnification obligations undertaken by the Custodian under
any relevant subcustodian agreement; provided, however, that such
indemnity shall not apply to the extent the Custodian is liable
under Sections 6 or 7 hereof.
If any Fund requires the Custodian to take any action with respect
to Securities, which action involves the payment of money or which
may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to such Fund being liable for the payment of
money or incurring liability of some other form, such Fund, as a
prerequisite to requiring the Custodian to take such action, shall
provide indemnity to the Custodian in an amount and form
satisfactory to it.
(b) INDEMNIFICATION BY CUSTODIAN.
Subject to the limitations set forth in this Agreement and in
addition to the obligations provided in Sections 6 and 7, the
Custodian agrees to indemnify and hold harmless each Fund from all
losses, damages and expenses suffered or incurred by each such Fund
caused by the gross negligence or willful misfeasance of the
Custodian.
9. ADVANCES.
In the event that, pursuant to Instructions, the Custodian or any
Subcustodian, Securities System, or Securities Depository or Clearing
Agency acting either directly or indirectly under agreement with the
Custodian (each of which for purposes of this Section 9 shall be referred
to as "Custodian"), makes any payment or transfer of funds on behalf of any
Fund as to which there would be, at the close of business on the date of
such payment or transfer, insufficient funds held by the Custodian on
behalf of any such Fund, the Custodian may, in its discretion without
further Instructions, provide an advance ("Advance") to any such Fund in an
amount sufficient to allow the completion of the transaction by reason of
which such payment or transfer of funds is to be made. In addition, in the
event the Custodian is directed by Instructions to make any payment or
transfer of funds on behalf of any Fund as to which it is subsequently
determined that such Fund has overdrawn its cash account with the Custodian
as of the close of business on the date of such payment or transfer, said
overdraft shall constitute an Advance. Any
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Advance shall be payable by the Fund on behalf of which the Advance was
made on demand by Custodian, unless otherwise agreed by such Fund and the
Custodian, and shall accrue interest from the date of the Advance to the
date of payment by such Fund to the Custodian at a rate agreed upon in
writing from time to time by the Custodian and such Fund. It is understood
that any transaction in respect of which the Custodian shall have made an
Advance, including but not limited to a foreign exchange contract or
transaction in respect of which the Custodian is not acting as a principal,
is for the account of and at the risk of the Fund on behalf of which the
Advance was made, and not, by reason of such Advance, deemed to be a
transaction undertaken by the Custodian for its own account and risk. The
Custodian and each of the Funds which are parties to this Agreement
acknowledge that the purpose of Advances is to finance temporarily the
purchase or sale of Securities for prompt delivery in accordance with the
settlement terms of such transactions or to meet emergency expenses not
reasonably foreseeable by a Fund. The Custodian shall promptly notify the
appropriate Fund of any Advance. Such notification shall be sent by
facsimile transmission or in such other manner as such Fund and the
Custodian may agree.
10. LIENS.
The Bank shall have a lien on the Property in the Custody Account to secure
payment of fees and expenses for the services rendered under this
Agreement. If the Bank advances cash or securities to the Fund for any
purpose or in the event that the Bank or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities
in connection with the performance of its duties hereunder, except such as
may arise from its or its nominee's negligent action, negligent failure to
act or willful misconduct, any Property at any time held for the Custody
Account shall be security therefor and the Fund hereby grants a security
interest therein to the Bank. The Fund shall promptly reimburse the Bank
for any such advance of cash or securities or any such taxes, charges,
expenses, assessments, claims or liabilities upon request for payment, but
should the Fund fail to so reimburse the Bank, the Bank shall be entitled
to dispose of such Property to the extent necessary to obtain
reimbursement. The Bank shall be entitled to debit any account of the Fund
with the Bank including, without limitation, the Custody Account, in
connection with any such advance and any interest on such advance as the
Bank deems reasonable.
11. COMPENSATION.
Each Fund will pay to the Custodian such compensation as is agreed to in
writing by the Custodian and each such Fund from time to time. Such
compensation, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 7(e), shall be billed to each such
Fund and paid in cash to the Custodian.
12. POWERS OF ATTORNEY.
Upon request, each Fund shall deliver to the Custodian such proxies, powers
of attorney or other instruments as may be reasonable and necessary or
desirable in connection with
22
<PAGE>
the performance by the Custodian or any Subcustodian of their respective
obligations under this Agreement or any applicable subcustodian agreement.
13. TERMINATION AND ASSIGNMENT.
Any Fund or the Custodian may terminate this Agreement by notice in
writing, delivered or mailed, postage prepaid (certified mail, return
receipt requested) to the other not less than 90 days prior to the date
upon which such termination shall take effect. Upon termination of this
Agreement, the appropriate Fund shall pay to the Custodian such fees as may
be due the Custodian hereunder as well as its reimbursable disbursements,
costs and expenses paid or incurred. Upon termination of this Agreement,
the Custodian shall deliver, at the terminating party's expense, all Assets
held by it hereunder to the appropriate Fund or as otherwise designated by
such Fund by Special Instructions. Upon such delivery, the Custodian shall
have no further obligations or liabilities under this Agreement except as
to the final resolution of matters relating to activity occurring prior to
the effective date of termination.
This Agreement may not be assigned by the Custodian or any Fund without the
respective consent of the other, duly authorized by a resolution by its
Board of Directors or Trustees.
14. ADDITIONAL FUNDS.
An additional Fund or Funds may become a party to this Agreement after the
date hereof by an instrument in writing to such effect signed by such Fund
or Funds and the Custodian. If this Agreement is terminated as to one or
more of the Funds (but less than all of the Funds) or if an additional Fund
or Funds shall become a party to this Agreement, there shall be delivered
to each party an Appendix B or an amended Appendix B, signed by each of the
additional Funds (if any) and each of the remaining Funds as well as the
Custodian, deleting or adding such Fund or Funds, as the case may be. The
termination of this Agreement as to less than all of the Funds shall not
affect the obligations of the Custodian and the remaining Funds hereunder
as set forth on the signature page hereto and in Appendix B as revised from
time to time.
15. NOTICES.
As to each Fund, notices, requests, instructions and other writings
delivered to THE SECURITY BENEFIT GROUP OF COMPANIES, 700 HARRISON, TOPEKA,
KS 66636-0001, postage prepaid, or to such other address as any particular
Fund may have designated to the Custodian in writing, shall be deemed to
have been properly delivered or given to a Fund.
Notices, requests, instructions and other writings delivered to the
Securities Administration Department of the Custodian at its office at 928
Grand Avenue, Kansas City, Missouri, or mailed postage prepaid, to the
Custodian's Securities Administration Department, Post Office Box 226,
Kansas City, Missouri 64141, or to such other addresses as the Custodian
may have designated to each Fund in writing, shall be deemed
23
<PAGE>
to have been properly delivered or given to the Custodian hereunder;
provided, however, that procedures for the delivery of Instructions and
Special Instructions shall be governed by Section 2(c) hereof..
16. MISCELLANEOUS.
(a) This Agreement is executed and delivered in the State of Missouri
and shall be governed by the laws of such state.
(b) All of the terms and provisions of this Agreement shall be binding
upon, and inure to the benefit of, and be enforceable by the
respective successors and assigns of the parties hereto.
(c) No provisions of this Agreement may be amended, modified or waived,
in any manner except in writing, properly executed by both parties
hereto; provided, however, Appendix A may be amended from time to
time as Domestic Subcustodians, Foreign Subcustodians, Special
Subcustodians, and Securities Depositories and Clearing Agencies
are approved or terminated according to the terms of this
Agreement.
(d) The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(e) This Agreement shall be effective as of the date of execution
hereof.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
(g) The following terms are defined terms within the meaning of this
Agreement, and the definitions thereof are found in the following
sections of the Agreement:
24
<PAGE>
TERM SECTION
Account 4(b)(3)(ii)
ADR'S 4(j)
Advance 9
Assets 2
Authorized Person 3
Banking Institution 4(l)
Domestic Subcustodian 5(a)
Foreign Subcustodian 5(b)
Instruction 2
Interim Subcustodian 5(c)
Interest Bearing Deposit 4(l)
Liability 10
OCC 4(g)(2)
Person 6(b)
Procedural Agreement 4(h)
SEC 4(b)(3)
Securities 2
Securities Depositories and Clearing Agencies 5(b)
Securities System 4(b)(3)
Shares 4(s)
Sovereign Risk 6(b)
Special Instruction 2
Special Subcustodian 5(c)
Subcustodian 5
1940 Act 4(v)
(h) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid by any court
of competent jurisdiction, the remaining portion or portions shall
be considered severable and shall not be affected, and the rights
and obligations of the parties shall be construed and enforced as
if this Agreement did not contain the particular part, term or
provision held to be illegal or invalid.
(i) This Agreement constitutes the entire understanding and agreement
of the parties hereto with respect to the subject matter hereof,
and accordingly supersedes, as of the effective date of this
Agreement, any custodian agreement heretofore in effect between the
Fund and the Custodian.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Custody Agreement to be
executed by their respective duly authorized officers.
ATTEST: Security Ultra Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Equity Fund
Equity Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Growth and Income Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Income Fund
Corporate Bond Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Income Series
Limited Maturity Bond Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
26
<PAGE>
ATTEST: Security Income Fund
U. S. Government Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Tax-Exempt Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Cash Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: SBL Fund
Series A, B, C, E, S and J
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: UMB BANK, N.A.
R. WILLIAM BLOOM By: DAVID SWAN
Title: Senior Vice President
Date: 1/11/95
27
<PAGE>
APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
Security Income Fund
Security Ultra Fund Limited Maturity Bond Series
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Equity Fund Security Income Fund
Equity Series U. S. Government Series
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Growth and Income Fund SBL Fund
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Income Fund
Corporate Bond Series UMB BANK, N.A.
By: JOHN D. CLELAND By: DAVID SWAN
Title: President Title: Senior Vice President
Date: 1/11/95
28
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment companies ("Funds") are hereby made
parties to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agree to be bound by all the terms and conditions contained
in said Agreement:
List of Funds
Security Income Fund, High Yield Series
SBL Fund, Series P
ATTEST: Security Income Fund
High Yield Series
AMY J. LEE
- ----------------------------------- By: JOHN D. CLELAND
-----------------------------------
Title: President
ATTEST: SBL Fund
Series P
AMY J. LEE
- ----------------------------------- By: JOHN D. CLELAND
-----------------------------------
Title: President
ATTEST: UMB BANK, N.A.
R.WM. BLOOM By: DAVID SWAN
- ----------------------------------- -----------------------------------
Title: Senior Vice President
Date: April 29, 1996
<PAGE>
AMENDMENT TO APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
Security Income Fund
High Yield Series
By: JAMES R. SCHMANK
-----------------------------------
Title: Vice President & Treasurer
SBL Fund
Series B
Series E
Series P
By: JAMES R. SCHMANK
-----------------------------------
Title: Vice President & Treasurer
UMB BANK, N.A.
By: RALPH SANTORO
-----------------------------------
Title: Vice President
Date: August 15, 1996
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment company ("Fund") is hereby made a
party to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agrees to be bound by all the terms and conditions contained
in said Agreement:
Security Equity Fund
Social Awareness Series
ATTEST: Security Equity Fund
Social Awareness Series
CHRIS SWICKARD
- -----------------------------------
By: JAMES R. SCHMANK
-----------------------------------
Title: Vice President and Treasurer
ATTEST: UMB BANK, N.A.
WILLIAM BLOEMKER By: RALPH SANTORO
- ----------------------------------- -----------------------------------
Title: Vice President
Date: August 15, 1996
<PAGE>
UMB Financial Corporation
CUSTODY FEE SCHEDULE
Security Management Group of Mutual Funds
- --------------------------------------------------------------------------------
NET ASSET VALUE CHARGES
A fee to be computed as of month-end and payable on the last day of each
month of the portfolios' fiscal year, at the annual rate of:
0.275 basis points on the combined net assets of all portfolios, subject to
a $100.00 per month minimum per portfolio.
PORTFOLIO TRANSACTION CHARGES
DTC Book-Entry Transactions* $5.00
PTC Book-Entry Transactions* 11.50
Federal Book-Entry Transactions* 7.50
Physical Transactions* 18.00
Third Party (Bank Book-Entry) Transactions 15.00
Principal and Interest Paydowns 3.00
Options/Futures 25.00
Corporate Actions/Calls/Reorgs 30.00
*A TRANSACTION INCLUDES BUYS, SELLS, MATURITIES, AND FREE SECURITY MOVEMENTS.
OUT OF POCKET EXPENSES
Including, but not limited to, security transfer fees, certificate fees,
shipping/courier fees or charges, FDIC insurance premiums, and remote
system access charges.
UMB Bank, N.A. agrees that the foregoing fees and charges will be in effect for
a period of three years beginning December 1, 1996, unless otherwise agreed by
the parties.
IN WITNESS WHEREOF, the parties hereto have executed this amendment to the
Custody Agreement dated January 1, 1995, this 26th day of November, 1996.
ATTEST: Security Ultra Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Equity Fund
Equity Series
Social Awareness Series
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
<PAGE>
ATTEST: Security Growth and Income Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Income Fund
Corporate Bond Series
Limited Maturity Bond Series
U.S. Government Bond Series
High Yield Series
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Tax-Exempt Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Cash Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: SBL Fund
Series A, B, C, E, S, J and P
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: UMB Bank, N.A.
R. W. BLOOM By: PATRICIA A. PETERSON
- -------------------------------- --------------------------------
Name: Patricia A. Peterson
Title: Senior Vice President
<PAGE>
AMENDMENT TO APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
Security Equity Fund
Value Series
By: AMY J. LEE
--------------------------------
Title: Secretary
SBL Fund
Series V
By: AMY J. LEE
--------------------------------
Title: Secretary
UMB BANK, N.A.
By: RALPH SANTORO
--------------------------------
Title: Vice President
Date: April 23, 1997
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment company ("Fund") is hereby made
party to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agrees to be bound by all the terms and conditions contained
in said Agreement:
Security Equity Fund, Value Series
SBL Fund, Series V
Security Equity Fund
ATTEST: Value Series
CHRIS SWICKARD By: AMY J. LEE
- --------------------------------- ---------------------------------
Title: Secretary
SBL Fund
ATTEST: Series V
CHRIS SWICKARD By: AMY J. LEE
- --------------------------------- ---------------------------------
Title: Secretary
ATTEST: UMB BANK, N.A.
CHRIS SWICKARD By: RALPH SANTORO
- --------------------------------- ---------------------------------
Title: Vice President
Date: February 14, 1997
<PAGE>
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective April 9, 1997, and is between THE CHASE
MANHATTAN BANK ("Bank") and SECURITY INCOME FUND ("Customer").
It is hereby agreed as follows:
1. CUSTOMER ACCOUNTS.
Bank shall establish and maintain the following accounts ("Accounts"):
(a) A custody account in the name of Customer ("Custody Account") for any
and all stocks, shares, bonds, debentures, notes, mortgages or other obligations
for the payment of money, bullion, coin and any certificates, receipts, warrants
or other instruments representing rights to receive, purchase or subscribe for
the same or evidencing or representing any other rights or interests therein and
other similar property whether certificated or uncertificated as may be received
by Bank or its Subcustodian (as defined in Section 3) for the account of
Customer ("Securities"); and
(b) A deposit account in the name of Customer ("Deposit Account") for any
and all cash in any currency received by Bank or its Subcustodian for the
account of Customer, which cash shall not be subject to withdrawal by draft or
check.
Customer warrants its authority to: 1) deposit the cash and Securities
("Assets") received in the Accounts and 2) give Instructions (as defined in
Section 11) concerning the Accounts. Bank may deliver securities of the same
class in place of those deposited in the Custody Account.
Upon written agreement between Bank and Customer, additional Accounts may
be established and separately accounted for as additional Accounts hereunder.
2. MAINTENANCE OF SECURITIES AND CASH AT BANK AND SUBCUSTODIAN LOCATIONS.
Unless Instructions specifically require another location acceptable to
Bank:
(a) Securities shall be held in the country or other jurisdiction to which
the principal trading market for such Securities is located, where such
Securities are to be presented for payment or where such Securities are
acquired; and
(b) Cash shall be credited to an account in a country or other jurisdiction
in which such cash may be legally deposited or is the legal currency for the
payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and Bank can comply with such
Instructions, Bank is authorized to maintain cash balances on deposit for
Customer with itself or one of
<PAGE>
its "Affiliates" at such reasonable rates of interest as may from time to time
be paid on such accounts, or in non-interest bearing accounts as Customer may
direct, if acceptable to Bank. For purposes hereof, the term "Affiliate" shall
mean an entity controlling, controlled by, or under common control with, Bank.
If Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians as defined in Section 3 (or
their securities depositories), such arrangement must be authorized by a written
agreement, signed by Bank and Customer.
3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES.
Bank may act hereunder through the subcustodians listed in Schedule A
hereof with which Bank has entered into subcustodial agreements
("Subcustodians"). Customer authorizes Bank to hold Assets in the Accounts in
accounts which Bank has established with one or more of its branches or
Subcustodians. Bank and Subcustodians are authorized to hold any of the
Securities in their account with any securities depository in which they
participate.
Bank reserves the right to add new, replace or remove Subcustodians.
Customer shall be given reasonable notice by Bank of any amendment to Schedule
A. Upon request by Customer, Bank shall identify the name, address and principal
place of business of any Subcustodian of Customer's Assets and the name and
address of the governmental agency or other regulatory authority that supervises
or regulates such Subcustodian.
4. USE OF SUBCUSTODIAN.
(a) Bank shall identify the Assets on its books as belonging to Customer.
(b) A Subcustodian shall hold such Assets together with assets belonging to
other customers of Bank in accounts identified on such Subcustodian's books as
custody accounts for the exclusive benefit of customers of Bank.
(c) Any Assets in the Accounts held by a Subcustodian shall be subject only
to the instructions of Bank or its agent. Any securities held in a securities
depository for the account of a Subcustodian shall be subject only to the
instructions of such Subcustodian.
(d) Any agreement Bank enters into with a Subcustodian for holding Bank's
customers' assets shall provide that such assets shall not be subject to any
right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets shall be freely transferable without the payment of
money or value other than for safe custody or administration. Where Securities
are deposited by a Subcustodian with a securities depository, Bank shall cause
the Subcustodian to identify on its books as belonging to Bank, as agent, the
Securities shown on the Subcustodian's account on the books of such securities
depository. The foregoing shall not apply to the extent of any special agreement
or arrangement made by Customer with any particular Subcustodian.
(e) Until further notice from Bank, Bank shall furnish annually to Customer
information concerning Subcustodians similar in kind and scope as that furnished
to Customer in connection with the initial approval hereof. Bank shall timely
advise Customer of any material adverse change in the facts or circumstances
upon which such information is based where such changes would affect the
eligibility of the Subcustodian under Rule 17f-5 as soon as practicable after
Bank becomes aware of any such material adverse change in the normal course of
Bank's custodial activities.
2
<PAGE>
5. DEPOSIT ACCOUNT TRANSACTIONS.
(a) Bank or its Subcustodians shall make payments from the Deposit Account
upon receipt of Instructions which include all information required by Bank.
(b) In the event that any payment to be made under this Section 5 exceeds
the funds available in the Deposit Account. Bank, in its discretion, may advance
Customer such excess amount which shall be deemed a loan payable on demand,
bearing interest at the rate customarily charged by Bank on similar loans.
(c) If Bank credits the Deposit Account on a payable date, or at any time
prior to actual collection and reconciliation to the Deposit Account, with
interest, dividends, redemptions or any other amount due, Customer shall
promptly return any such amount upon oral or written notification: (i) that such
amount has not been received in the ordinary course of business or (ii) that
such amount was incorrectly credited. If Customer does not promptly return any
amount upon such notification, Bank shall be entitled, upon oral or written
notification to Customer, to reverse such credit by debiting the Deposit Account
for the amount previously credited. Bank or its Subcustodian shall have no duty
or obligation to institute legal proceedings, file a claim or a proof of claim
in any insolvency proceeding or take any other action with respect to the
collection of such amount, but may act for Customer upon Instructions after
consultation with Customer.
6. CUSTODY ACCOUNT TRANSACTIONS.
(a) Securities shall be transferred, exchanged or delivered by Bank or its
Subcustodian upon receipt by Bank of Instructions which include all information
required by Bank. Settlement and payment for Securities received for, and
delivery of Securities out of, the Custody Account may be made in accordance
with the customary or established securities trading or securities processing
practices and procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivery of Securities to a purchaser,
dealer or their agents against a receipt with the expectation of receiving later
payment and free delivery. Delivery of Securities out of the Custody Account may
also be made in any manner specifically required by Instructions acceptable to
Bank.
(b) Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect to any sale,
exchange or purchase of Securities. Otherwise, such transactions shall be
credited or debited to the Accounts on the date cash or Securities are actually
received by Bank and reconciled to the Account.
(i) Bank may reverse credits or debits made to the Accounts in its
discretion if the related transaction fails to settle within a reasonable
period, determined by Bank in its discretion, after the contractual
settlement date for the related transaction.
(ii) If any Securities delivered pursuant to this Section 6 are
returned by the recipient thereof, Bank may reverse the credits and debits
or the particular transaction at any time.
7. ACTIONS OF BANK.
Bank shall follow Instructions received regarding Assets held in the
Accounts. However, until it receives Instructions to the contrary, Bank shall:
(a) Present for payment any Securities which are called, redeemed or
retired or otherwise become payable and all coupons and other income items which
call for payment upon presentation, to the extent that Bank or Subcustodian is
actually aware of such opportunities.
3
<PAGE>
(b) Execute in the name of Customer such ownership and other certificates
as may be required to obtain payments in respect of Securities.
(c) Exchange interim receipts or temporary Securities for definitive
Securities.
(d) Appoint brokers and agents for any transaction involving the
Securities, including, without limitation, Affiliates of Bank or any
Subcustodian.
(e) Issue statements to Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
Bank shall send Customer an advice or notification of any transfers of
Assets to or from the Accounts. Such statements, advices or notifications shall
indicate the identity of the entity having custody of the Assets. Unless
Customer sends Bank a written exception or objection to any Bank statement
within sixty (60) days of receipt, Customer shall be deemed to have approved
such statement. In such event, or where Customer has otherwise approved any such
statement, Bank shall, to the extent permitted by law, be released, relieved and
discharged with respect to all matters set forth in such statement or reasonably
implied therefrom as though it had been settled by the decree of a court of
competent jurisdiction in an action where Customer and all persons having or
claiming an interest in Customer or Customer's Accounts were parties.
All collections of funds or other property paid or distributed in respect
of Securities in the Custody Account shall be made at the risk of Customer. Bank
shall have no liability for any loss occasioned by delay in the actual receipt
of notice by Bank or by its Subcustodians of any payment, redemption or other
transaction regarding Securities in the Custody Account in respect of which Bank
has agreed to take any action hereunder.
8. CORPORATE ACTIONS; PROXIES; TAX RECLAIMS.
(a) CORPORATE ACTIONS. Whenever Bank receives information concerning the
Securities which requires discretionary action by the beneficial owner of the
Securities (other than a proxy), such as subscription rights, bonus issues,
stock repurchase plans and rights offerings, or legal notices or other material
intended to be transmitted to securities holders ("Corporate Actions"), Bank
shall give Customer notice of such Corporate Actions to the extent that Bank's
central corporate actions department has actual knowledge of a Corporate Action
in time to notify its customers.
When a rights entitlement or a fractional interest resulting from a rights
issue, stock dividend, stock split or similar Corporate Action is received which
bears an expiration date, Bank shall endeavor to obtain Instructions from
Customer or its Authorized Person (as defined in Section 10 hereof), but if
Instructions are not received in time for Bank to take timely action, or actual
notice of such Corporate Action was received too late to seek Instructions, Bank
is authorized to sell such rights entitlement of fractional interest and to
credit the Deposit Account with the proceeds or take any other action it deems,
in good faith, to be appropriate in which case it shall be held harmless for any
such action.
(b) PROXY VOTING. Bank shall provide proxy voting services, if elected by
Customer, in accordance with the terms of the proxy voting services rider
hereto. Proxy voting services may be provided by Bank or, in whole or in part,
by one or more third parties appointed by Bank (which may be Affiliates of
Bank).
4
(c) TAX RECLAIMS.
(i) Subject to the provisions hereof, Bank shall apply for a reduction
of withholding tax and any refund of any tax paid or tax credits which
apply in each applicable market in respect of income payments on Securities
for the benefit of Customer which Bank believes may be available to such
Customer.
(ii) The provision of tax reclaim services by Bank is conditional upon
Bank receiving from the beneficial owner of Securities (A) a declaration of
its identity and place of residence and (B) certain other documentation
(pro forma copies of which are available from Bank). Customer acknowledges
that, if Bank does not receive such declarations, documentation and
information, additional United Kingdom taxation shall be deducted from all
income received in respect of Securities issued outside the United Kingdom
and that U.S. non-resident alien tax or U.S. backup withholding tax shall
be deducted from U.S. source income. Customer shall provide to Bank such
documentation and information as it may require in connection with
taxation, and warrants that, when given, this information shall be true and
correct in every respect, not misleading in any way, and contain all
material information. Customer undertakes to notify Bank immediately if any
such information requires updating or amendment.
(iii) Bank shall not be liable to Customer or any third party for any
taxes, fines or penalties payable by Bank or Customer, and shall be
indemnified accordingly, whether these result from the inaccurate
completion of documents by Customer or any third party, or as a result of
the provision to Bank or any third party of inaccurate or misleading
information or the withholding of material information by Customer or any
other third party, or as a result of any delay of any revenue authority or
any other matter beyond the control of Bank.
(iv) Customer confirms that Bank is authorized to deduct from any cash
received or credited to the Deposit Account any taxes or levies required by
any revenue or governmental authority for whatever reason in respect of the
Securities or Cash Accounts.
(v) Bank shall perform tax reclaim services only with respect to
taxation, levied by the revenue authorities of the countries notified to
Customer from time to time and Bank may, by notification in writing, at its
absolute discretion, supplement or amend the markets in which the tax
reclaim services are offered. Other than as expressly provided in this
sub-clause, Bank shall have no responsibility with regard to Customer's tax
position or status in any jurisdiction.
(vi) Customer confirms that Bank is authorized to disclose any
information requested by any revenue authority or any governmental body in
relation to Customer or the Securities and/or Cash held for Customer.
(vii) Tax reclaim services may be provided by Bank or, in whole or in
part, by one or more third parties appointed by Bank (which may be
Affiliates of Bank); provided that Bank shall be liable for the performance
of any such third party to the same extent as Bank would have been if it
performed such services itself.
9. NOMINEES.
Securities which are ordinarily held in registered form may be registered
in a nominee name of Bank, Subcustodian or securities depository, as the case
may be. Bank may without notice to Customer cause any such Securities to cease
to be registered in the name of any such nominee and to be registered in the
name of Customer. In the event that any Securities registered in a nominee name
are called for partial
5
<PAGE>
redemption by the issuer, Bank may allot the called portion to the respective
beneficial holders of such class of security in any manner Bank deems to be fair
and equitable. Customer shall hold Bank, Subcustodians, and their respective
nominees harmless from any liability arising directly or indirectly from their
status as a mere record holder of Securities in the Custody Account.
10. AUTHORIZED PERSONS.
As used herein, the term "Authorized Person" means employees or agents
including investment managers as have been designated by written notice from
Customer or its designated agent to act on behalf of Customer hereunder. Such
persons shall continue to be Authorized Persons until such time as Bank receives
Instructions from Customer or its designated agent that any such employee or
agent is no longer an Authorized Person.
11. INSTRUCTIONS.
The term "Instructions" means instructions of any Authorized Person
received by Bank, via telephone, telex, facsimile transmission, bank wire or
other teleprocess or electronic instruction or trade information system
acceptable to Bank which Bank believes in good faith to have been given by
Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Bank may specify. Unless
otherwise expressly provided, all Instructions shall continue in full force and
effect until canceled or superseded.
Any Instructions delivered to Bank by telephone shall promptly thereafter
be confirmed in writing by an Authorized Person (which confirmation may bear the
facsimile signature of such Person), but Customer shall hold Bank harmless for
the failure of an Authorized Person to send such confirmation in writing, the
failure of such confirmation to conform to the telephone instructions received
or Bank's failure to produce such confirmation at any subsequent time. Bank may
electronically record any Instructions given by telephone, and any other
telephone discussions with respect to the Custody Account. Customer shall be
responsible for safeguarding any testkeys, identification codes or any other
security devices which Bank shall make available to Customer or its Authorized
Persons.
12. STANDARD OF CARE; LIABILITIES.
(a) Bank shall be responsible for the performance of only such duties as
are set forth herein or expressly contained in Instructions which are consistent
with the provisions hereof as follows:
(i) Bank shall use reasonable care with respect to its obligations
hereunder and the safekeeping of Assets. Bank shall be liable to Customer
for any loss which shall occur as the result of the failure of a
Subcustodian to exercise reasonable care with respect to the safekeeping of
such Assets to the same extent that Bank would be liable to Customer if
Bank were holding such Assets in New York. In the event of any loss to
Customer by reason of the failure of Bank or its Subcustodian to utilize
reasonable care, Bank shall be liable to Customer only to the extent of
Customer's direct damages, to be determined based on the market value of
the property which is the subject of the loss at the date of discovery of
such loss and without reference to any special conditions or circumstances.
Bank shall have no liability whatsoever for any consequential, special,
indirect or speculative loss or damages (including, but not limited to,
lost profits) suffered by Customer in connection with the transactions
contemplated hereby and the relationship established hereby even if Bank
has been advised as to the possibility of the same and regardless of the
form of the action. As long as Bank shall have been in compliance with its
obligations pursuant to Section
6
4(e) hereof, Bank shall not be responsible for the insolvency of any
Subcustodian which is not a branch or Affiliate of Bank.
(ii) Bank shall not be responsible for any act, omission, default or
the solvency of any broker or agent which it or a Subcustodian appoints
unless such appointment was made negligently or in bad faith.
(iii) Bank shall be indemnified by, and without liability to Customer
for any action taken or omitted by Bank whether pursuant to Instructions
otherwise within the scope hereof if such act or omission was in good
faith, without negligence. In performing its obligations hereunder, Bank
may rely on the genuineness of any document which it believes in good faith
to have been validly executed.
(iv) Customer shall pay for and hold Bank harmless from any liability
or loss resulting from the imposition or assessment of any taxes or other
governmental charges, and any related expenses with respect to income from
or Assets in the Accounts.
(v) Bank shall be entitled to rely, and may act, upon the advice of
counsel (who may be counsel for Customer) on all matters and shall be
without liability for any action reasonably taken or omitted pursuant to
such advice.
(vi) Bank need not maintain any insurance for the benefit of Customer.
(vii) Without limiting the foregoing, Bank shall not be liable for any
loss which results from: 1) the general risk of investing, or 2) investing
or holding Assets in a particular country including, but not limited to,
losses resulting from malfunction, interruption of or error in the
transmission of information caused by any machines or system or
interruption of communication facilities, abnormal operating conditions,
nationalization, expropriation or other governmental actions; regulation of
the banking or securities industry; currency restrictions, devaluations or
fluctuations; and market conditions which prevent the orderly execution of
securities transactions or affect the value of Assets.
(viii) Neither party shall be liable to the other for any loss due to
forces beyond their control including, but not limited to strikes or work
stoppages, acts of war (whether declared or undeclared) or terrorism,
insurrection, revolution, nuclear fusion, fission or radiation, or acts of
God.
(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that Bank shall have no duty or
responsibility to:
(i) question Instructions or make any suggestions to Customer or an
Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to investments or
the retention of Securities;
(iii) advise Customer or an Authorized Person regarding any default in
the payment of principal or income of any security other than as provided
in Section 5(c) hereof;
7
<PAGE>
(iv) evaluate or report to Customer or an Authorized Person regarding
the financial condition of any broker, agent or other party to which
Securities are delivered or payments are made pursuant hereto; and
(v) review or reconcile trade confirmations received from brokers.
Customer or its Authorized Persons issuing Instructions shall bear any
responsibility to review such confirmations against Instructions issued to
and statements issued by Bank.
(c) Customer authorizes Bank to act hereunder notwithstanding that Bank or
any of its divisions or Affiliates may have a material interest in a
transaction, or circumstances are such that Bank may have a potential conflict
of duty or interest including the fact that Bank or any of its Affiliates may
provide brokerage services to other customers, act as financial advisor to the
issuer of Securities, act as a lender to the issuer of Securities, act in the
same transaction as agent for more than one customer, have a material interest
in the issue of Securities, or earn profits from any of the activities listed
herein.
13. FEES AND EXPENSES.
Customer shall pay Bank for its services hereunder the fees set forth in
Schedule B hereto or such other amounts as may be agreed upon in writing,
together with Bank's reasonable out-of-pocket or incidental expenses, including,
but not limited to, legal fees. Bank shall have a lien on and is authorized to
charge any Accounts of Customer for any amount owing to Bank under any provision
hereof.
14. MISCELLANEOUS.
(a) FOREIGN EXCHANGE TRANSACTIONS. To facilitate the administration of
Customer's trading and investment activity, Bank is authorized to enter into
spot or forward foreign exchange contracts with Customer or an Authorized Person
for Customer and may also provide foreign exchange through its subsidiaries,
Affiliates or Subcustodians. Instructions, including standing instructions, may
be issued with respect to such contracts but Bank may establish rules or
limitations concerning any foreign exchange facility made available. In all
cases where Bank, its subsidiaries, Affiliates or Subcustodians enter into a
foreign exchange contract related to Accounts, the terms and conditions of the
then current foreign exchange contract of Bank, its subsidiary, Affiliate or
Subcustodian and, to the extent not inconsistent, this Agreement shall apply to
such transaction.
(b) CERTIFICATION OF RESIDENCY, ETC. Customer certifies that it is a
resident of the United States and shall notify Bank of any changes in residency.
Bank may rely upon this certification or the certification of such other facts
as may be required to administer Bank's obligations hereunder. Customer shall
indemnify Bank against all losses, liability, claims or demands arising directly
or indirectly from any such certifications.
(c) ACCESS TO RECORDS. Bank shall allow Customer's independent public
accountant reasonable access to the records of Bank relating to the Assets as is
required in connection with their examination of books and records pertaining to
Customer's affairs. Subject to restrictions under applicable law, Bank shall
also obtain an undertaking to permit Customer's independent public accountants
reasonable access to the records of any Subcustodian which has physical
possession of any Assets as may be required in connection with the examination
of Customer's books and records.
(d) GOVERNING LAW: SUCCESSORS AND ASSIGNS, CAPTIONS. THIS AGREEMENT SHALL
BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED IN NEW YORK and shall not be assignable by either party, but
shall
8
<PAGE>
bind the successors in interest of Customer and Bank. The captions given to the
sections and subsections of this Agreement are for convenience of reference only
and are not to be used to interpret this Agreement.
(e) ENTIRE AGREEMENT; APPLICABLE RIDERS. Customer represents that the
Assets deposited in the Accounts are (Check one):
_____ Employee Benefit Plan or other assets subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")
__X__ Investment Company assets subject to certain U.S. Securities and
Exchange Commission rules and regulations;
_____ Neither of the above.
This Agreement consists exclusively of this document together with Schedule
A, Exhibits I and the following Riders [Check applicable riders]:
_____ ERISA
__X__ INVESTMENT COMPANY
__X__ PROXY VOTING
__X__ SPECIAL TERMS AND CONDITIONS
There are no other provisions hereof and this Agreement supersedes any
other agreements, whether written or oral, between the parties. Any amendment
hereto must be in writing, executed by both parties.
(f) SEVERABILITY. In the event that one or more provisions hereof are held
invalid, illegal or unenforceable in any respect on the basis of any particular
circumstances or in any jurisdiction, the validity, legality and enforceability
of such provision or provisions under other circumstances or in other
jurisdictions and of the remaining provisions shall not in any way be affected
or impaired.
(g) WAIVER. Except as otherwise provided herein, no failure or delay on the
part of either party in exercising any power or right hereunder operates as a
waiver, nor does any single or partial exercise of any power or right preclude
any other or further exercise, or the exercise of any other power or right. No
waiver by a party of any provision hereof, or waiver of any breach or default,
is effective unless in writing and signed by the party against whom the waiver
is to be enforced.
(h) REPRESENTATIONS AND WARRANTIES. (i) Customer hereby represents and
warrants to Bank that: (A) it has full authority and power to deposit and
control the Securities and cash deposited in the Accounts; (B) it has all
necessary authority to use Bank as its custodian; (C) this Agreement constitutes
its legal, valid and binding obligation, enforceable in accordance with its
terms; (D) it shall have full authority and power to borrow moneys and enter
into foreign exchange transactions; and (E) it has not relied on any oral or
written representation made by Bank or any person on its behalf, and
acknowledges that this Agreement sets out to the fullest extent the duties of
Bank. (ii) Bank hereby represents and warrants to Customer that: (A) it has the
full power and authority to perform its obligations hereunder, (B) this
Agreement constitutes its legal, valid and binding obligation; enforceable in
accordance with its terms; and (C) that it has taken all necessary action to
authorize the execution and delivery hereof.
9
<PAGE>
(i) NOTICES. All notices hereunder shall be effective when actually
received. Any notices or other communications which may be required hereunder
are to be sent to the parties at the following addresses or such other addresses
as may subsequently be given to the other party in writing: (a) Bank: The Chase
Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, NY 11245, Attention: Global
Investor Services, Investment Management Group; and (b) Customer:
SECURITY INCOME FUND.
(j) TERMINATION. This Agreement may be terminated by Customer or Bank by
giving sixty (60) days written notice to the other, provided that such notice to
Bank shall specify the names of the persons to whom Bank shall deliver the
Assets in the Accounts. If notice of termination is given by Bank, Customer
shall, within sixty (60) days following receipt of the notice, deliver to Bank
Instructions specifying the names of the persons to whom Bank shall deliver the
Assets. In either case Bank shall deliver the Assets to the persons so
specified, after deducting any amounts which Bank determines in good faith to be
owed to it under Section 13. If within sixty (60) days following receipt of a
notice of termination by Bank, Bank does not receive Instructions from Customer
specifying the names of the persons to whom Bank shall deliver the Assets, Bank,
at its election, may deliver the Assets to a bank or trust company doing
business in the State of New York to be held and disposed of pursuant to the
provisions hereof, or to Authorized Persons, or may continue to hold the Assets
until Instructions are provided to Bank.
(k) MONEY LAUNDERING. Customer warrants and undertakes to Bank for itself
and its agents that all Customer's customers are properly identified in
accordance with U.S. Money Laundering Regulations as in effect from time to
time.
(l) IMPUTATION OF CERTAIN INFORMATION. Bank shall not be held responsible
for and shall not be required to have regard to information held by any person
by imputation or information of which Bank is not aware by virtue of a "Chinese
Wall" arrangement. If Bank becomes aware of confidential information which in
good faith it feels inhibits it from effecting a transaction hereunder Bank may
refrain from effecting it.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first-above written.
CUSTOMER
By: JAMES R. SCHMANK
---------------------------------
Title:
Date:
THE CHASE MANHATTAN BANK
By: MARY ELLEN COSTELLO
---------------------------------
Title:
Date:
10
<PAGE>
STATE OF KANSAS )
:ss.
COUNTY OF SHAWNEE)
On this 11th day of April, 1997, before me personally came James R.
Schmank, to me known, who being by me duly sworn, did depose and say that he/she
resides in Topeka, Kansas at 700 SW Harrison, that he/she is Vice President and
Treasurer of Security Income Fund, the entity described in and which executed
the foregoing instrument; that he/she knows the seal of said entity, that the
seal affixed to said instrument is such seal, that it was so affixed by order of
said entity, and that he/she signed his/her name thereto by like order.
JAMES R. SCHMANK
--------------------------------
Sworn to before me this 11th day of April, 1997.
L. CHARMAINE LUCAS
- --------------------------------
Notary
<PAGE>
STATE OF NEW YORK )
:ss.
COUNTY OF NEW YORK )
On this 9th day of April, 1997, before me personally came Mary Ellen
Costello, to me known, who being by me duly sworn, did depose and say that
he/she resides in New York, New York at 435 East 79th; that he/she is a Vice
President of THE CHASE MANHATTAN BANK, the corporation described in and which
executed the foregoing instrument; that he/she knows the seal of said
corporation, that the seal affixed to said instrument is such corporate seal,
that it was so affixed by order of the Board of Directors of said corporation,
and that he/she signed his/her name thereto by like order.
MARY ELLEN COSTELLO
--------------------------------
Sworn to before me this 9th day of April, 1997.
LAIYEE NG
- --------------------------------
Notary
<PAGE>
SCHEDULE A
Argentina The Chase Manhattan Bank
Australia The Chase Manhattan Bank
Austria Creditanstalt-Bankverein
Bahrain The British Bank of the Middle East
Bangladesh Standard Chartered Bank Plc
Belgium Generale Banque
Botswana Barclays Bank of Botswana Ltd.
Brazil Banco Chase Manhattan, S.A
Canada Canada Trust Company
Royal Bank of Canada
Chile The Chase Manhattan Bank
China (Shanghai) Hong Kong Shanghai Banking Corporation, Ltd.
China (Shenzen) Hong Kong Shanghai Banking Corporaiton, Ltd.
Colombia Sociedad Fiduciaria International, S.A.
Cyprus Barclays Bank, Plc.
Czech Republic Ceskoslovenska Obchodni Banka, A.S.
Denmark Den Danske Bank
Ecuador Citibank, N.A.
Egypt National Bank of Egypt
EuroBonds Cedel, S.A. (Luxembourg)
Euro CDs First Chicago Clearing Centre
Finland Kansallis-Osake-Pankki
France Banque Paribas
Germany Chase Bank, A.G.
Ghana Barclays Bank of Ghana Ltd.
Greece Barclays Bank Plc
Hong Kong The Chase Manhattan Bank
Hungary Citibank Budapest Rt
India Deutsche Bank
Hong Kong Shanghai Banking Corporation, Ltd.
Indonesia Hong Kong Shanghai Banking Corporation, Ltd.
Ireland Bank of Ireland
Israel Bank Leumi Le-Israel B.M.
Italy The Chase Manhattan Bank
Japan Fuji Bank
Jordan Arab Bank, Plc
Kenya Barclays Bank of Kenya Ltd.
Lebanon The British Bank of the Middle East
Luxembourg Banque Generale du Luxembourg, S.A.
Malaysia The Chase Manhattan Bank
Mauritius Hong Kong Shanghai Banking Corporation, Ltd.
Mexico Chase Manhattan Bank Mexico, S.A.
Banco Nacional de Mexico, S.A. (Gov't Bonds)
Morocco Banque Commercial du Maroc
<PAGE>
Namibia Standard Bank Namibia Ltd.
Netherlands ABN AMRO Bank N.V.
New Zealand National Nominees Limited
Norway Den norske Bank
Oman The British Bank of the Middle East
Pakistan Citibank, N.A.
Deutsche Bank
Peru Citibank, N.A.
Philippines Hong Kong Shanghai Banking Corporation, Ltd.
Poland Bank Polska Kasa Opieki S.A.
Bank Handlowy W. Warsawie S.A.
Portugal Banco Espirito Santo E Comercial de Lisboa
Russia The Chase Manhattan Bank International
Singapore The Chase Manhattan Bank
Slovak Republic Ceskoslovenska Obchodni Banka, S.A.
South Africa Standard Bank of South Africa
South Korea Hong Kong Shanghai Banking Corporation, Ltd.
Spain The Chase Manhattan Bank
Banque Bruxelles Lambert (Gov't Bonds)
Sri Lanka Hong Kong Shanghai Banking Corporation
Switzerland Union Bank of Switzerland
Sweden Skandinaviska Enskilda Banken
Switzerland Union Bank of Switzerland
Taiwan The Chase Manhattan Bank
Thailand The Chase Manhattan Bank
Turkey The Chase Manhattan Bank
United Kingdom The Chase Manhattan Bank
United States The Chase Manhattan Bank
Uruguay The First National Bank of Boston
Venezuela Citibank, N.A.
Zambia Barclays Bank of Zambia, Ltd.
Zimbabwe Barclays Bank of Zimbabwe, Ltd.
<PAGE>
EXHIBIT I
Dated April 9, 1997
Security Income Fund
Emerging Market Total Return Series
Global Asset Allocation Series
<PAGE>
Investment Company Rider to Global Custody Agreement
Between The Chase Manhattan Bank and
SECURITY INCOME FUND
effective April 9, 1997
Customer represents that the Assets being placed in Bank's custody are
subject to the Investment Company Act of 1940, as amended (the "1940 Act"), as
the same may be amended from time to time.
Except to the extent that Bank has specifically agreed to comply with a
condition of a rule, regulation, interpretation promulgated by or under the
authority of the Securities and Exchange Commission ("SEC") or the Exemptive
Order applicable to accounts of this nature issued to Bank (1940 Act, Release
No. 12053, November 20, 1981), as amended, or unless Bank has otherwise
specifically agreed, Customer shall be solely responsible to assure that the
maintenance of Assets hereunder complies with such rules, regulations,
interpretations or exemptive order promulgated by or under the authority of the
SEC.
The following modifications are made to the Agreement:
Section 3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES.
Add the following language to the end of Section 3:
The terms Subcustodian and securities depositories as used herein shall
mean a branch of a qualified U.S. bank, an eligible foreign custodian or an
eligible foreign securities depository, which are further defined as
follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined in
Rule 17f-5 under the 1940 Act;
(b) "eligible foreign custodian" shall mean (i) a banking institution or
trust company, incorporated or organized under the laws of a country other
than the United States, that is regulated as such by that country's
government or an agency thereof and that has shareholder's equity in excess
of $200 million in U.S. currency (or a foreign currency equivalent thereof)
as of the close of its fiscal year most recently completed prior to the
date hereof, (ii) a majority owned direct or indirect subsidiary of a
qualified U.S. bank or bank holding company that is incorporated or
organized under the laws of a country other than the United States and that
has shareholders' equity in excess of $100 million in U.S. currency (or a
foreign currency equivalent thereof) as of the close of its fiscal year
most recently completed prior to the date hereof, (iii) a banking
institution or trust company incorporated or organized under the laws of a
country other than the United States or a majority owned direct or indirect
subsidiary of a qualified U.S. bank or bank holding company that is
incorporated or organized under the laws of a country other than the United
States which has such other qualifications as shall be specified in
Instructions and approved by Bank; or (iv) any other entity that shall have
been so qualified by exemptive order, rule or other appropriate action of
the SEC; and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws of
a country other than the United States, which operates (i) the central
system for handling securities or equivalent book-entries in that country,
or (iia transnational system for the central handling of securities or
equivalent book-entries.
<PAGE>
Customer represents that its Board of Directors has approved each of the
Subcustodians listed in Schedule A hereto and the terms of the subcustody
agreeements between Bank and Subcustodian, which are attached as Exhibits I of
Schedule A, and further represents that its Board has determined that the use of
each Subcustodian and the terms of each subcustody agreement are consistent with
the best interests of the Fund(s) and its (their) shareholders. Bank shall
supply Customer with any amendment to Schedule A for approval. Customer has
supplied or shall supply Bank with certified copies of its Board of Directors
resolution(s) with respect to the foregoing prior to placing Assets with any
Subcustodian so approved.
Section 11. INSTRUCTIONS.
Add the following language to the end of Section 11:
Deposit Account Payments and Custody Account Transactions made pursuant to
Section 5 and 6 hereof may be made only for the purposes listed below.
Instructions must specify the purpose for which any transaction is to be
made and Customer shall be solely responsible to assure that Instructions
are in accord with any limitations or restrictions applicable to Customer
by law or as may be set forth in its prospectus.
(a) In connection with the purchase or sale of Securities at prices as
confirmed by Instructions;
(b) When Securities are called, redeemed or retired, or otherwise become
payable;
(c) In exchange for or upon conversion into other securities alone or other
securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment;
(d) Upon conversion of Securities pursuant to their terms into other
securities;
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities;
(f) For the payment of interest, taxes, management or supervisory fees,
distributions or operating expenses;
(g) In connection with any borrowings by Customer requiring a pledge of
Securities, but only against receipt of amounts borrowed;
(h) In connection with any loans, but only against receipt of adequate
collateral as specified in Instructions which shall reflect any
restrictions applicable to Customer;
(i) For the purpose of redeeming shares of the capital stock of Customer
and the delivery to, or the crediting to the account of, Bank, its
Subcustodian or Customer's transfer agent, such shares to be purchased or
redeemed;
(j) For the purpose of redeeming in kind shares of Customer against
delivery to Bank, its Subcustodian or Customer's transfer agent of such
shares to be so redeemed;
(k) For delivery in accordance with the provisions of any agreement among
Customer, Bank and a broker-dealer registered under the Securities Exchange
Act of 1934 and a member of The National Association of Securities Dealers,
Inc., relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange, or of any
similar organ-
<PAGE>
ization or organizations, regarding escrow or other arrangements in
connection with transactions by Customer;
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released only
upon payment to Bank of monies for the premium due and a receipt for the
Securities which are to be held in escrow. Upon exercise of the option, or
at expiration, Bank shall receive from brokers the Securities previously
deposited. Bank shall act strictly in accordance with Instructions in the
delivery of Securities to be held in escrow and shall have no
responsibility or liability for any such Securities which are not returned
promptly when due other than to make proper request for such return;
(m) For spot or forward foreign exchange transactions to facilitate
security trading, receipt of income from Securities or related
transactions;
(n) For other proper purposes as may be specified in Instructions issued by
an officer of Customer which shall include a statement of the purpose for
which the delivery or payment is to be made, the amount of the payment or
specific Securities to be delivered, the name of the person or persons to
whom delivery or payment is to be made, and a certification that the
purpose is a proper purpose under the instruments governing Customer; and
(o) Upon the termination hereof as set forth in Section 14(j).
Section 12. STANDARD OF CARE; LIABILITIES.
Add the following at the end of Section as 12:
(d) Bank hereby warrants to Customer that in its opinion, after due
inquiry, the established procedures to be followed by each of its branches,
each branch of a qualified U.S. Bank, each eligible foreign custodian and
each eligible foreign securities depository holding Customer's Securities
pursuant hereto afford protection for such Securities at least equal to
that afforded by Bank's established procedures with respect to similar
securities held by Bank and its securities depositories in New York.
Section 14. ACCESS TO RECORDS.
ADD THE FOLLOWING LANGUAGE TO THE END OF SECTION 14(C).
Upon reasonable request from Customer, Bank shall furnish Customer such
reports (or portions thereof) of Bank's system of internal accounting
controls applicable to Bank's duties hereunder. Bank shall endeavor to
obtain and furnish Customer with such similar reports as it may reasonably
request with respect to each Subcustodian and securities depository holding
Assets.
<PAGE>
GLOBAL PROXY SERVICE RIDER
To Global Custody Agreement
Between
THE CHASE MANHATTAN BANK
AND
SECURITY INCOME FUND
dated April 9, 1997.
1. Global Proxy Services ("Proxy Services") shall be provided for the countries
listed in the procedures and guidelines ("Procedures") furnished to
Customer, as the same may be amended by Bank from time to time on prior
notice to Customer. The Procedures are incorporated by reference herein and
form a part of this Rider.
2. Proxy Services shall consist of those elements as set forth in the
Procedures, and shall include (a) notifications ("Notifications") by Bank to
Customer of the dates pending shareholder meetings, resolutions to be voted
upon and the return dates as may be received by Bank or provided to Bank by
its Subcustodians or third parties, and (b) voting by Bank of proxies based
on Customer directions. Original proxy materials or copies thereof shall not
be provided. Notifications shall generally be in English and, where
necessary, shall be summarized and translated from such non-English
materials as have been made available to Bank or its Subcustodian. In this
respect Bank's only obligation is to provide information from sources it
believes to be reliable and/or to provide materials summarized and/or
translated in good faith. Bank reserves the right to provide Notifications,
or parts thereof, in the language received. Upon reasonable advance request
by Customer, backup information relative to Notifications, such as annual
reports, explanatory material concerning resolutions, management
recommendations or other material relevant to the exercise of proxy voting
rights shall be provided as available, but without translation.
3. While Bank shall attempt to provide accurate and complete Notifications,
whether or not translated, Bank shall not be liable for any losses or other
consequences that may result from reliance by Customer upon Notifications
where Bank prepared the same in good faith.
4. Notwithstanding the fact that Bank may act in a fiduciary capacity with
respect to Customer under other agreements or otherwise under the Agreement,
in performing Proxy Services Bank shall be acting solely as the agent of
Customer, and shall not exercise any discretion with regard to such Proxy
Services.
5. Proxy voting may be precluded or restricted in a variety of circumstances,
including, without limitation, where the relevant Securities are: (i) on
loan; (ii) at registrar for registration or reregistration; (iii) the
subject of a conversion or other corporate action; (iv) not held in a name
subject to the control of Bank or its Subcustodian or are otherwise held in
a manner which precludes voting; (v) not capable of being voted on account
of local market regulations or practices or restrictions by the issuer; or
(vi) held in a margin or collateral account.
6. Customer acknowledges that in certain countries Bank may be unable to vote
individual proxies but shall only be able to vote proxies on a net basis
(E.G., a net yes or no vote given the voting instructions received from all
customers).
<PAGE>
7. Customer shall not make any use of the information provided hereunder,
except in connection with the funds or plans covered hereby, and shall in no
event sell, license, give or otherwise make the information provided
hereunder available, to any third party, and shall not directly or
indirectly compete with Bank or diminish the market for Proxy Services by
provision of such information, in whole or in part, for compensation or
otherwise, to any third party.
8. The names of Authorized Persons for Proxy Services shall be furnished to
Bank in accordance with ss.10 of the Agreement. Proxy Services fees shall be
as set forth in ss.13 of the Agreement or as separately agreed.
<PAGE>
DOMESTIC AND GLOBAL
SPECIAL TERMS AND CONDITIONS RIDER
DOMESTIC CORPORATE ACTIONS AND PROXIES
With respect to domestic U.S. and Canadian Securities (the latter if held in
DTC), the following provisions shall apply rather than the pertinent provisions
of Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of
Bank's nominee or the nominee of a central depository) and
communications with respect to Securities in the Custody Account as
call for voting or relate to legal proceedings within a reasonable
time after sufficient copies are received by Bank for forwarding to
its customers. In addition, Bank shall follow coupon payments,
redemptions, exchanges or similar matters with respect to Securities
in the Custody Account and advise Customer or the Authorized Person
for such Account of rights issued, tender offers or any other
discretionary rights with respect to such Securities, in each case, of
which Bank has received notice from the issuer of the Securities, or
as to which notice is published in publications routinely utilized by
Bank for this purpose.
Add the following at the beginning of the last sentence of Section 12(a)(i):
"As long as Bank shall have been in compliance with its obligations pursuant to
Section 4(b) hereof,"
<PAGE>
THE CHASE MANHATTAN BANK
FEE SCHEDULE
FOR
Security Income Fund - Emerging Market Total Return Series and
Global Asset Allocation Series
I. DOMESTIC CUSTODY
(Market value fees and transaction charges to be applied on a fund by fund
basis)
MARKET VALUE FEES
$0 - $300MM 1.00bp
$300MM - $600MM 0.75bp
Over $600MM 0.50bp
TRANSACTIONS
Book Entry $ 8.00
Physical $15.00
II. GLOBAL CUSTODY
COUNTRY SAFEKEEPING AND TRANSACTION FEES
(To be applied on a fund by fund basis)
BASIS POINT TRANSACTIONS
Band A 3.5 $ 30
Band B 5.5 $ 40
Band C 6.5 $ 60
Band D 9.5 $ 60
Band E 11.5 $ 80
Band F 26.5 $120
Band G 41.5 $120
MINIMUM ANNUAL CUSTODY FEE* $25,000
*Calculated on the entire SBL/Chase relationship
III. MISCELLANEOUS FEES
Out of pocket expenses (i.e., scrip fees As incurred
stamp taxes, transaction costs, etc.)
Transfer to successor custodian Refer to country bands
THE CHASE MANHATTAN BANK SECURITY INCOME FUND
KATHLEEN ROEDER JAMES R. SCHMANK
- ------------------------------------------- -----------------------------------
<PAGE>
COUNTRY BAND SCHEDULE
BAND A BAND B BAND C
- ------ ------ ------
Japan Canada Australia
Cedel Germany Belgium
Euroclear Netherlands Denmark
Switzerland France
New Zealand
Norway
Sweden
United Kingdom
BAND D BAND E BAND F
- ------ ------ ------
Austria Mexico Argentina
Finland Portugal Brazil
Hong Kong Spain Chile
Ireland Thailand Colombia
Italy Greece
Luxembourg Indonesia
Malaysia Jordan
Singapore Pakistan
South Africa Philippines
South Korea
Turkey
Venezuela
BAND G
------
Bahrain Lebanon
Bangladesh Mauritius
Botswana Morocco
China (Shenzhen & Shanghai) Namibia
Cyprus Oman
Czech Republic Peru
Ecuador Poland
Egypt Slovakia
Estonia Sri Lanka
Ghana Swaziland
Hungary Taiwan
India Uruguay
Israel Zambia
Kenya Zimbabwe
<PAGE>
SECURITY INCOME FUND
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
This Agreement is made as of this 28th day of April, 1997, by and between
Security Income Fund, a Kansas corporation ("Fund"), and Security Management
Company, LLC, a Kansas limited liability company ("SMC, LLC"), located in
Topeka, Kansas.
WHEREAS, the Fund is engaged in business as an open-end management investment
company registered under the Investment Company Act of 1940 (the "1940 Act");
and
WHEREAS, Security Management Company, LLC is willing to provide general
administrative, fund accounting, transfer agency, and dividend disbursing
services to EMERGING MARKETS TOTAL RETURN SERIES and GLOBAL ASSET ALLOCATION
SERIES (the "Series") of the Fund under the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties agree as follows:
1. EMPLOYMENT OF SECURITY MANAGEMENT COMPANY, LLC
SMC, LLC will provide the Series with general administrative, fund
accounting, transfer agency, and dividend disbursing services described and
set forth in Schedule A attached hereto and made a part of this agreement
by reference. SMC, LLC agrees to maintain sufficient trained personnel,
equipment and supplies to perform such services in conformity with the
current prospectus of the Series and such other reasonable standards of
performance as the Fund may from time to time specify, and otherwise in an
accurate, timely and efficient manner.
2. COMPENSATION
As consideration for the services described in Section A, the Fund agrees
to pay SMC, LLC a fee as described and set forth in Schedule B attached
hereto and made a part of this agreement by reference, as it may be amended
from time to time, such fee to be calculated and accrued daily and payable
monthly.
3. EXPENSES
A. EXPENSES OF SMC, LLC. SMC, LLC shall pay all of the expenses incurred
in providing the Series the services and facilities described in this
agreement, whether or not such expenses are billed to SMC, LLC or the
Fund, except as otherwise provided herein.
<PAGE>
B. EXPENSES OF SERIES. Expenses to be incurred in the operation of the
Series shall be borne by the Series, except as provided by Section 3.A.
Expenses to be borne by the Series include, but are not limited to,
taxes; interest; brokerage fees and commissions, if any; fees of
directors who are not "interested persons" of the Fund as that term is
defined in the 1940 Act; Securities and Exchange Commission ("SEC")
fees and state Blue Sky qualification fees; advisory and administration
fees; charges of custodians, transfer and dividend disbursing agents;
insurance premiums; outside auditing and legal expenses; costs of
maintenance of "corporate existence"; costs of preparation and
transmission of registration statements and other SEC filings;
typesetting and printing of prospectuses for regulatory purposes and
for distribution to shareholders of the Fund; costs of shareholders'
reports and corporate meetings; and any extraordinary expenses.
4. INSURANCE
The Fund and SMC, LLC agree to procure and maintain, separately or as joint
insureds with themselves, their directors, employees, agents and others,
and other investment companies for which SMC, LLC acts as investment
advisor and transfer agent, a policy or policies of insurance against loss
arising from breaches of trust, errors and omissions, and a fidelity bond
meeting the requirements of the 1940 Act, in the amounts and with such
deductibles as may be agreed upon from time to time, and to pay such
portions of the premiums therefor as amount of the coverage attributable to
each party is to the aggregate amount of the coverage for all parties or,
with respect to the errors and omissions coverage, on the basis of the
respective insureds' net assets or other reasonable basis.
5. REGISTRATION AND COMPLIANCE
A. SMC, LLC represents that as of the date of this agreement it is
registered as a transfer agent with the Securities and Exchange
Commission ("SEC") pursuant to Subsection 17A of the Securities
Exchange Act of 1934 and the rules and regulations thereunder, and
agrees to maintain said registration and comply with all of the
requirements of said Act, rules and regulations so long as this
agreement remains in force.
B. The Fund represents that it is a diversified management investment
company registered with the SEC in accordance with the 1940 Act and the
rules and regulations thereunder, and authorized to sell its shares
pursuant to the 1940 Act, the Securities Act of 1933 and the rules and
regulations thereunder.
6. LIABILITY AND INDEMNIFICATION
SMC, LLC shall be liable for any actual losses, claims, damages or expenses
(including any reasonable counsel fees and expenses) resulting from SMC,
LLC's bad faith, willful misfeasance, reckless disregard of its obligations
and duties, negligence or failure to properly perform any of its
responsibilities or duties under this agreement. SMC, LLC shall not be
liable and shall be indemnified and held harmless by the Fund, for any
claim, demand or action brought against it arising out of, or in connection
with:
<PAGE>
A. Bad faith, willful misfeasance, reckless disregard of its duties or
negligence of the Board of Directors of the Fund, or SMC, LLC's acting
upon any instructions properly executed and authorized by the Board of
Directors of the Fund;
B. SMC, LLC acting in reliance upon advice given by independent counsel
retained by the Board of Directors of the Fund.
In the event that SMC, LLC requests the Fund to indemnify or hold it
harmless hereunder, SMC, LLC shall use its best efforts to inform the Fund
of the relevant facts concerning the matter in question. SMC, LLC shall use
reasonable care to identify and promptly notify the Fund concerning any
matter which presents, or appears likely to present, a claim for
indemnification against the Fund.
The Fund shall have the election of defending SMC, LLC against any claim
which may be the subject of indemnification hereunder. In the event the
Fund so elects, it will so notify SMC, LLC and thereupon the Fund shall
take over defenses of the claim, and if so requested by the Fund, SMC, LLC
shall incur no further legal or other claims related thereto for which it
would be entitled to indemnity hereunder provided, however, that nothing
herein contained shall prevent SMC, LLC from retaining, at its own expense,
counsel to defend any claim. Except with the Fund's prior consent, SMC, LLC
shall in no event confess any claim or make any compromise in any matter in
which the Fund will be asked to indemnify or hold SMC, LLC harmless
hereunder.
PUNITIVE DAMAGES. SMC, LLC shall not be liable to the Fund, or any
third party, for punitive, exemplary, indirect, special or
consequential damages (even if SMC, LLC has been advised of the
possibility of such damages) arising from its obligations and the
services provided under this agreement, including but not limited to
loss of profits, loss of use of the shareholder accounting system,
cost of capital and expenses of substitute facilities, programs or
services.
FORCE MAJEURE. Anything in this agreement to the contrary
notwithstanding, SMC, LLC shall not be liable for delays or errors
occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national
emergencies, work stoppages, fire, flood, catastrophe, earthquake,
acts of God, insurrection, war, riot, failure of communication or
interruption.
7. DELEGATION OF DUTIES
SMC, LLC may, at its discretion, delegate, assign or subcontract any of the
duties, responsibilities and services governed by this agreement to its
affiliate, Security Benefit Group, Inc., whether or not by formal written
agreement, or to any third party, provided
<PAGE>
that such arrangement with a third party has been approved by the Board of
Directors of the Fund. SMC, LLC shall, however, retain ultimate
responsibility to the Fund, and shall implement such reasonable procedures
as may be necessary, for assuring that any duties, responsibilities or
services so assigned, subcontracted or delegated are performed in
conformity with the terms and conditions of this agreement.
8. AMENDMENT
This agreement and the schedules forming a part hereof may be amended at
any time, without shareholder approval, by a writing signed by each of the
parties hereto. Any change in the Fund's registration statements or other
documents of compliance or in the forms relating to any plan, program or
service offered by its current prospectus which would require a change in
SMC, LLC's obligations hereunder shall be subject to SMC, LLC's approval,
which shall not be unreasonably withheld.
9. TERMINATION
This agreement may be terminated by either party without cause upon 120
days' written notice to the other, and at any time for cause in the event
that such cause remains unremedied for more than 30 days after receipt by
the other party of written specification of such cause.
In the event the Fund designates a successor to any of SMC, LLC's
obligations hereunder, SMC, LLC shall, at the expense and pursuant to the
direction of the Fund, transfer to such successor all relevant books,
records and other data of the Fund in the possession or under the control
of SMC, LLC.
10. SEVERABILITY
If any clause or provision of this agreement is determined to be illegal,
invalid or unenforceable under present or future laws effective during the
term hereof, then such clause or provision shall be considered severed
herefrom and the remainder of this agreement shall continue in full force
and effect.
11. TERM
This agreement initially shall become effective upon its approval by a
majority vote of the Board of Directors of the Fund, including a majority
vote of the Directors who are not "interested persons" of the Fund or SMC,
LLC, as defined in the 1940 Act, and shall continue until terminated
pursuant to its provisions.
<PAGE>
12. APPLICABLE LAW
This agreement shall be subject to and construed in accordance with the
laws of the State of Kansas.
SECURITY MANAGEMENT COMPANY, LLC
By: JAMES R. SCHMANK
--------------------------------
James R. Schmank, President
ATTEST:
AMY J. LEE
- --------------------------------
Amy J. Lee, Secretary
SECURITY INCOME FUND
By: JOHN D. CLELAND
--------------------------------
John D. Cleland, President
ATTEST
AMY J. LEE
- --------------------------------
Amy J. Lee, Secretary
<PAGE>
SECURITY INCOME FUND
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
SCHEDULE A
Security Management Company, LLC agrees to provide the Series the following
Administrative facilities and services:
1. FUND AND PORTFOLIO ACCOUNTING
A. Maintenance of Fund General Ledger and Journal.
B. Preparing and recording disbursements for direct series expenses.
C. Preparing daily money transfers.
D. Reconciliation of all Series bank and custodian accounts.
E. Assisting Fund independent auditors as appropriate.
F. Prepare daily projection of available cash balances.
G. Record trading activity for purposes of determining net asset values
and daily dividend.
H. Prepare daily portfolio evaluation report to value portfolio securities
and determine daily accrued income.
I. Determine the daily net asset value per share.
J. Determine the daily, monthly, quarterly, semiannual or annual dividend
per share.
K. Prepare monthly, quarterly, semiannual and annual financial statements.
L. Provide financial information for reports to the Securities and
Exchange Commission in compliance with the provisions of the 1940 Act
and the Securities Act of 1933, the Internal Revenue Service and other
regulatory agencies as required.
M. Provide financial, yield, net asset value, etc. information to NASD and
other survey and statistical agencies as instructed by the Fund.
N. Report to the Audit Committee of the Board of Directors, if applicable.
<PAGE>
2. ADMINISTRATIVE
A. Provide registration and other administrative services necessary to
qualify the shares of the Series for sale in those jurisdictions
determined from time to time by the Fund's Board of Directors (commonly
known as "Blue Sky Registration").
B. Provide registration with and reports to the Securities and Exchange
Commission in compliance with the provisions of the 1940 Act and the
Securities Act of 1933.
C. Prepare and review Series prospectus and Statement of Additional
Information.
D. Prepare proxy statements and oversee proxy tabulation for annual
meetings.
E. Prepare Board materials and maintain minutes of Board meetings.
F. Draft, review and maintain contractual agreements between Fund and
Investment Advisor, Custodian, Distributor and Transfer Agent.
G. Oversee printing of proxy statements, financial reports to
shareholders, prospectuses and Statements of Additional Information.
H. Provide oversight regarding shareholder transactions, administrative
services, compliance with contractual agreements and the provisions of
the 1940 Act and the Securities Act of 1933.
<PAGE>
SCHEDULE OF SHARE TRANSFER AND DIVIDEND DISBURSING SERVICES
Security Management Company, LLC agrees to provide the Series the following
transfer agency and dividend disbursing services:
1. Maintenance of shareholder accounts, including processing of new accounts.
2. Posting address changes and other file maintenance for shareholder
accounts.
3. Posting all transactions to the shareholder file, including:
A. Direct purchases
B. Wire order purchases
C. Direct redemptions
D. Wire order redemptions
E. Draft redemptions
F. Direct exchanges
G. Transfers
H. Certificate issuances
I. Certificate deposits
4. Monitor fiduciary processing, insuring accuracy and deduction of fees.
5. Prepare daily reconciliations of shareholder processing to money movement
instructions.
6. Handle bad/returned check collections. Immediately liquidate shares
purchased and return to the shareholder the check and confirmation of the
transaction.
7. Issuing all checks and stopping and replacing lost checks.
8. Draft clearing services.
A. Maintenance of signature cards and appropriate corporate resolutions.
B. Comparison of the signature on the check to the signatures on the
signature card for the purpose of paying the face amount of the check
only.
<PAGE>
C. Receiving checks presented for payment and liquidating shares after
verifying account balance.
D. Ordering checks in quantity specified by the Series for the
shareholder, if applicable.
9. Mailing confirmations, checks and/or certificates resulting from
transaction requests to shareholders.
10. Performing all of the Series' other mailings, including:
A. Dividend and capital gain distributions.
B. Semiannual and annual reports.
C. 1099/year-end shareholder reporting.
D. Systematic withdrawal plan payments.
E. Daily confirmations.
11. Answering all service related telephone inquiries from shareholders and
others, including:
A. General and policy inquiries (research and resolve problems).
B. Fund yield inquiries.
C. Taking shareholder processing requests and account maintenance changes
by telephone as described above.
D. Submit pending requests to correspondence.
E. Monitor on-line statistical performance of unit.
F. Develop reports on telephone activity.
12. Respond to written inquiries (research and resolve problems), including:
A. Initiate shareholder account reconciliation proceeding when
appropriate.
B. Notify shareholder of bad/returned investment checks.
C. Respond to financial institutions regarding verification of deposit.
D. Initiate proceedings regarding lost certificates.
<PAGE>
E. Respond to complaints and log activities.
F. Correspondence control.
13. Maintaining and retrieving all required past history for shareholders and
provide research capabilities as follows:
A. Daily monitoring of all processing activity to verify back-up
documentation.
B. Provide exception reports.
C. Microfilming.
D. Storage, retrieval and archive.
14. Prepare materials for annual meetings.
A. Address and mail annual proxy and related material.
B. Prepare and submit to Fund and affidavit of mailing.
C. Furnish certified list of shareholders (hard copy or microfilm) and
inspectors of election.
15. Report and remit as necessary for state escheat requirements.
<PAGE>
SECURITY INCOME FUND
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
SCHEDULE B
The following charges apply to the Series:
Annual Maintenance Fee: $8.00 per account
Transaction Fee: $1.00
Dividend Fee: $1.00
Annual Administration Fee: 0.045% (based on average daily net asset values)
Annual Accounting Fee: The greater of .10 percent of the Series'
average net assets or (i) $30,000 in the year ending May 1, 1998; (ii) $45,000
in the year ending May 1, 1999; and (iii) $60,000 thereafter.
If this Agreement shall terminate before the last day of a month, compensation
for that part of the month this Agreement is in effect shall be prorated in a
manner consistent with the calculation of the fees set forth above.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the incorporation by reference of
our report dated January 31, 1997 in Post-Effective Amendment No. 58 to the
Registration Statement (Form N-1A) and related Prospectus of Security Income
Fund filed with the Securities and Exchange Commission under the Securities Act
of 1933 (Registration No. 2-38414) and under the Investment Company Act of 1940
(Registration No. 811-2120).
Ernst & Young LLP
Kansas City, Missouri
April 25, 1997
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(CLASS A)
U.S. GOVERNMENT SERIES Yield Calculation As Of December 31, 1996 = 6.05%
[[ (52,929.61 + 90.19 - 4,377.87) ]6 ]
2 [[----------------------------------------- + 1 ] ]-1
[[ (1,938,691.57)(5.04) ] ]
[ ( ( 48,641.93 ) )6 ]
2 [ ( (----------------------------- ) +1 ) ] -1
[ ( ( 9,771,005.513 ) ) ]
2[((.004978191 + 1) 6 ) -1]
2[(1.030243359) -1]
2(.030243359)
= .060486719 December 31, 1996, Govt. A
CORPORATE BOND SERIES Yield Calculation As Of December 31, 1996 = 6.30%
[[ (461,121.00 - 61,286.75) ]6 ]
2 [[----------------------------------------- + 1 ] ]-1
[[ (10,694,969.715)(7.21) ] ]
[ ( ( 399,834.25 ) )6 ]
2 [ ( (----------------------------- ) +1 ) ] -1
[ ( ( 77,110,731.645 ) ) ]
2[((1.005185196 + 1) 6 ) -1]
2[(1.031517268) -1]
2(.031517268)
= .063034536 December 31, 1996, Corp. A
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(CLASS A)
LIMITED MATURITY BOND SERIES Yield Calculation As Of December 31, 1996 = 5.56%
[[ (28,825.66 - 6,625.59) ]6 ]
2 [[----------------------------------------- + 1 ] ]-1
[[ (454,949.150)(10.65) ] ]
[ ( ( 22,200.07 ) )6 ]
2 [ ( (----------------------------- ) +1 ) ] -1
[ ( ( 4,845,208.448 ) ) ]
2[((.00458186 + 1) 6 ) -1]
2[(1.02780799) -1]
2(.02780799)
= .05561598 December 31, 1996, Limited Maturity Bond Series A
HIGH YIELD SERIES Yield Calculation As Of December 31, 1996 = 7.10%
[[ (20,576.57 - 3,793.26) ]6 ]
2 [[----------------------------------------- + 1 ] ]-1
[[ (179,028.278)(16.08) ] ]
[ ( ( 16,783.31 ) )6 ]
2 [ ( (----------------------------- ) +1 ) ] -1
[ ( ( 2,878,775 ) ) ]
2[((.00583002 + 1) 6 ) -1]
2[(1.035494) -1]
2(.035494)
= .070988 December 31, 1996, High Yield A
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(CLASS B)
U.S. GOVERNMENT SERIES Yield Calculation As Of December 31, 1996 = 4.96%
[[ (3,550.32 + 5.06 - 1,000.28) ]6 ]
2 [[----------------------------------------- + 1 ] ]-1
[[ (130,078.206)(4.80) ] ]
[ ( ( 2,555.10 ) )6 ]
2 [ ( (----------------------------- ) +1 ) ] -1
[ ( ( 624,375.39 ) ) ]
2[((.004092246 + 1) 6 ) -1]
2[(1.024806047) -1]
2(.024806047)
= .049612093 December 31, 1996, Govt. B
CORPORATE BOND SERIES Yield Calculation As Of December 31, 1996 = 5.59%
[[ (44,970.28 - 11,791.06) ]6 ]
2 [[----------------------------------------- + 1 ] ]-1
[[ (1,043,014.177)(6.91) ] ]
[ ( ( 33,179.22 ) )6 ]
2 [ ( (----------------------------- ) +1 ) ] -1
[ ( ( 7,207,227.963 ) ) ]
2[((.004603603 + 1) 6 ) -1]
2[(1.027941473) -1]
2(.027941473)
= .055882946 December 31, 1996, Corp. B
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(CLASS B)
LIMITED MATURITY BOND SERIES Yield Calculation As Of December 31, 1996 = 5.55%
[[ (4,760.21 - 1,256.50) ]6 ]
2 [[----------------------------------------- + 1 ] ]-1
[[ (75,573.334)(10.14) ] ]
[ ( ( 3,503.71 ) )6 ]
2 [ ( (----------------------------- ) +1 ) ] -1
[ ( ( 766,313.61 ) ) ]
2[((.004572166 + 1) 6 ) -1]
2[(1.027748483) -1]
2(.027748483)
= .055496965 December 31, 1996, Limited Maturity B
HIGH YIELD SERIES Yield Calculation As Of December 31, 1996 = 6.68%
[[ (20,132.43 - 5,187.94) ]6 ]
2 [[----------------------------------------- + 1 ] ]-1
[[ (177,692.63)(15.32) ] ]
[ ( ( 14,944.49 ) )6 ]
2 [ ( (----------------------------- ) +1 ) ] -1
[ ( ( 2,722,251 ) ) ]
2[((.00548975 + 1) 6 ) -1]
2[(1.033394) -1]
2(.033394)
= .066788 December 31, 1996, High Yield B
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of December 31, 1996
Average Annual Total Return Of CORPORATE BOND SERIES (CLASS A)
1. Average Total Return For 1 Year = -5.69%
1000 (1+T) 1 = 943.10
(1+T) 1 = 0.9431
1+T = 0.9431
T = (.0569)
2. Average Total Return For 5 Years = +4.96%
1000 (1+T) 5 = 1,273.85
(1+T) 5 = 1.273852
((1+T) 5)1/5 = (1.273852)1/5
1+T = 1.0496
T = .0496
3. Average Total Return For 10 Years = +6.74%
1000 (1+T) 10 = 1,919.72
(1+T) 10 = 1,91972
((1+T) 10)1/10 = (1.91972)1/10
1+T = 1.0674
T = .0674
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of December 31, 1996
Average Annual Total Return Of U.S. GOVERNMENT SERIES (CLASS A)
1. Average Total Return For 1 Year = -3.59%
1000 (1+T) 1 = 964.13
(1+T) 1 = 0.96413
T = (0.0359)
2. Average Total Return For 5 Years = +5.19%
1000 (1+T) 5 = 1,288.15
(1+T) 5 = 1.28815
((1+T) 5)1/5 = (1.28815)1/5
1+T = 1.0519
T = .0519
3. Average Total Return For 10 Years = +7.10%
1000 (1+T) 10 = 1,984.72
(1+T) 10 = (1.98472)
((1+T) 10)1/10 = (1.98472)1/10
1+T = 1.0710
T = .0710
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of December 31, 1996
Average Annual Total Return Of LIMITED MATURITY BOND SERIES (CLASS A)
1. Average Total Return For 1 Year = -2.74%
1000 (1+T) 1 = 972.55
(1+T) 1 = 0.97255
T = (.0274)
2. Average Total Return Since Inception (January 17, 1995) = +4.94%
1000 (1+T) 1.953425 = 1,098.74
(1+T) 1.953425 = 1.09874
((1+T) 1.953425)1/1.953425 = (1.0494) 1/1.953425
(1+T) = 1.0494
T = .0494
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of December 31, 1996
Average Annual Total Return Of:
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES) (CLASS A)
1. Average Total Return For 1 Year = +6.24%
1000 (1+T) 1 = 1,062.38
(1+T) 1 = 1.06238
T = (.0624)
2. Average Total Return Since Inception (June 1, 1995) = +8.63%
1000 (1+T) 1.5863 = 1,140.35
(1+T) 1.5863 = 1.14035
((1+T) 1.5863)1/1.5863 = 1.0863
(1+T) = 1.0863
T = .0863
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of December 31, 1996
Average Annual Total Return Of HIGH YIELD SERIES (CLASS A)
1. Average Annual Total Return Since Inception (August 5, 1996) = +.23%
1000 (1+T) .408 = 1,000.95
(1+T) .408 = 1.00095
((1+T) .408)1/.408 = (1.00095)1/.408
(1+T) = 1.0023
T = .0023
=======
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-CORPORATE BOND SERIES
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 7.43
= 134.59 shares.
Ending value of initial investment at December 31, 1996, NAV price = 134.59
shares x 6.91 = $930.02.
Ending value of shares received from reinvestment of all dividends at NAV = 8.16
shares x 6.91 = $56.39.
Contingent deferred sales charge = 986.40 x .05 = $49.32.
Total ending redeemable value: 930.02
56.39
- (49.32)
-------
937.09
Total Return: 937.09 - 1,000 = (62.91)
(62.91) / 1,000 = -6.29%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 937.09
less value at beginning.............. 1,000.00
--------
(62.91)
Change (62.91)
-------
Beginning Value 1,000 = -6.29%
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-U.S. GOVERNMENT SERIES
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 4.97
= 201.207 shares.
Ending value of initial investment at December 31, 1996, NAV price = 201.207
shares x 4.71 = $947.68.
Ending value of shares received from reinvestment of all dividends at NAV =
11.168 shares x 4.71 = $52.60.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 947.68
52.60
- (50.00)
-------
950.28
Total Return: 950.28 - 1,000 = (49.72)
(49.72) / 1,000 = -4.97%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 950.28
less value at beginning.............. 1,000.00
--------
(49.72)
Change (49.72)
-------
Beginning Value 1,000 = -4.97%
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-LIMITED MATURITY BOND SERIES
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 10.67
= 93.7207 shares.
Ending value of initial investment at December 31, 1996, NAV price = 93.7207
shares x 10.14 = $950.33.
Ending value of shares received from reinvestment of all dividends at NAV =
5.9316 shares x 10.14 = $60.15.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 950.33
60.15
- (50.00)
-------
960.48
Total Return: 960.48 - 1,000 = (39.52)
(39.52) / 1,000 = -3.95%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 960.48
less value at beginning.............. 1,000.00
--------
(39.52)
Change (39.52)
-------
Beginning Value 1,000 = -3.95%
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-GLOBAL HIGH YIELD SERIES
(FORMERLY GLOBAL AGGRESSIVE BOND SERIES)
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 10.17
= 98.32842 shares.
Ending value of initial investment at December 31, 1996, NAV price = 98.32842
shares x 10.41 = $1,023.60.
Ending value of shares received from reinvestment of all dividends at NAV =
7.98538 shares x 10.41 = $83.13.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 1,023.60
83.13
- (50.00)
---------
1,056.73
Total Return: 1,056.73 - 1,000 = 56.73
56.73 / 1,000 = 5.67%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 1,056.73
less value at beginning.............. 1,000.00
--------
56.73
Change 56.73
-----
Beginning Value 1,000 = 5.67%
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-HIGH YIELD SERIES
B SHARES
1. Average Annual Total Return Since Inception (August 5, 1996) = -.24%
1000 (1+T) .408 = 999.03
(1+T) .408 = .99903
((1+T) .408)1/.408 = (.99903)1/.408
(1+T) = .9976
T = -.0024
======
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
CORPORATE BOND SERIES - CLASS A
For the period of 12/31/86 to 12/31/96 (with deduction of sales charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,919.72
--------
Net Increase In Value = $ 919.72
Total Return - NET INCREASE = 919.72 = 92.0%
--------------
initial investment = 1,000.00
U.S. GOVERNMENT SERIES - CLASS A
For the period of 12/31/86 to 12/31/96 (with deduction of sales charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,984.72
--------
Net Increase In Value = $ 984.72
Total Return - NET INCREASE = 984.72 = 98.5%
-------------- ------
initial investment = 1,000.00
LIMITED MATURITY BOND SERIES - CLASS A
For the period of 1/17/95 to 12/31/96 (with deduction of sales charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,098.74
--------
Net Increase In Value = $ 98.74
Total Return - NET INCREASE = 98.74 = 9.9%
-------------- -------
initial investment = 1,000.00
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES) CLASS A
For the period of 6/01/95 to 12/31/96 (with deduction of sales charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,140.35
--------
Net Increase In Value = $ 140.35
Total Return - NET INCREASE = 140.35 = 14.0%
-------------- ----------
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
HIGH YIELD SERIES - CLASS A
For the period of 5/05/96 to 12/31/96 (with deduction of sales charge)
Total Return from August 5, 1996 (inception), to December 31, 1996. Assuming
Initial Investment of $1,000 at offering price at the beginning of period $1,000
/ 15.75 = 63.4921 shares.
Ending value of initial investment at December 31, 1996, NAV price = 63.4921
shares x 15.32 = $972.70.
Ending value of shares received from reinvestment of all dividends at NAV =
1.8443 shares x 15.32 = $28.25.
Total ending redeemable value: 972.70
+ 28.25
--------
1,000.95
Total Return: 1,000.95 - 1,000 = .95
.95 / 1,000 = .001 or .10%
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
CORPORATE BOND SERIES - CLASS B
For the period of 10/19/93 to 12/31/96 (with deduction of 3% CDSC charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 990.99
------
Net Increase In Value = $ (9.01)
Total Return - NET INCREASE = (9.01) = (0.9%)
-------------- ----------
initial investment = 1,000.00
U.S. GOVERNMENT SERIES - CLASS B
For the period of 10/19/93 to 12/31/96 (with deduction of 3% CDSC charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,063.97
--------
Net Increase In Value = $ 63.97
Total Return - NET INCREASE = 63.97 = 6.4%
-------------- ---------
initial investment = 1,000.00
LIMITED MATURITY BOND SERIES - CLASS B
For the period of 01/17/95 to 12/31/96 (with deduction of 4% CDSC charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,093.45
--------
Net Increase In Value = $ 93.45
Total Return - NET INCREASE = 93.45 = 9.3%
-------------- ---------
initial investment = 1,000.00
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES) CLASS B
For the period of 06/01/95 to 12/31/96 (with deduction of 4% CDSC charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,142.74
--------
Net Increase In Value = $ 142.74
Total Return - NET INCREASE = 142.74 = 14.27%
-------------- ----------
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
HIGH YIELD SERIES - CLASS B
For the period of 8/05/96 to 12/31/96 (with deduction of 5% CDSC charge)
Total Return from August 5, 1996 (inception), to December 31, 1996. Assuming
Initial Investment of $1,000 at offering price at the beginning of period $1,000
/ 15.00 = 66.667 shares.
Ending value of initial investment at December 31, 1996, NAV price = 66.667
shares x 15.32 = $1,021.34
Ending value of shares received from reinvestment of all dividends at NAV =
1.807 shares x 15.32 = $27.68.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 1,021.34
27.68
+ (50.00)
---------
999.02
Total Return: 999.02 - 1,000 = (.98)
(.98) / 1,000 = -.10%
HIGH YIELD SERIES - CLASS B
For the period of 8/05/96 to 12/31/96 (without deduction of 5% CDSC charge)
Ending value of initial investment at December 31, 1996, NAV price = 66.667
shares x 15.32 = $1,021.34
Ending value of shares received from reinvestment of all dividends at NAV =
1.807 shares x 15.32 = $27.68.
Total ending redeemable value: 1,021.34
+ 27.68
--------
1,049.02
Total Return: 1,049.02 - 1,000 = 49.02
49.02 / 1,000 = .04902 or 4.90%
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
U.S. GOVERNMENT SERIES (Class A Shares) Quotation of Total Return for the Period
of December 31, 1986, through December 31, 1996 (without deduction of the sales
charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 1,039 - 1,000 = 39 39 / 1,000 = 3.9%
Year 2 1,104 - 1,039 = 65 65 / 1,039 = 6.2%
Year 3 1,234 - 1,104 = 130 130 / 1,104 = 11.8%
Year 4 1,355 - 1,234 = 121 121 / 1,234 = 9.8%
Year 5 1,542 - 1,355 = 187 187 / 1,355 = 13.8%
Year 6 1,619 - 1,542 = 77 77 / 1,542 = 5.0%
Year 7 1,809 - 1,619 = 190 190 / 1,619 = 11.8%
Year 8 1,691 - 1,809 = (118) (118) / 1,809 = (6.5%)
Year 9 2,060 1,691 = 369 369 / 1,691 = 21.8%
Year 10 2,086 2,060 = 26 26 / 2,060 = 1.3%
Initial Investment = $1,000.00
Ending Value Of Investment = 2,086.00
--------
Net Increase In Value = $1,086.00
Total Return - NET INCREASE = 1,086.00 = 108.6%
-------------- ------------
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
CORPORATE BOND SERIES (Class A Shares) Quotation of Total Return for the Period
of December 31, 1985, through December 31, 1996 (without deduction of the sales
charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 1,040 - 1,000 = 40 40 / 1,000 = 4.0%
Year 2 1,107 - 1,040 = 67 67 / 1,040 = 6.4%
Year 3 1,217 - 1,107 = 110 110 / 1,107 = 9.9%
Year 4 1,297 - 1,217 = 80 80 / 1,217 = 6.6%
Year 5 1,507 - 1,297 = 210 210 / 1,297 = 16.2%
Year 6 1,641 - 1,507 = 134 134 / 1,507 = 8.9%
Year 7 1,867 - 1,641 = 226 226 / 1,641 = 13.8%
Year 8 1,713 - 1,867 = (154) (154) / 1,867 = (8.2%)
Year 9 2,025 1,713 = 312 312 / 1,713 = 18.2%
Year 10 2,014 2,025 = (11) (11) / 2,025 = (0.5%)
Initial Investment = $1,000.00
Ending Value Of Investment = 2,014.00
--------
Net Increase In Value = $1,014.00
Total Return - NET INCREASE = 1,014.00 = 101.4%
-------------- ------------
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
LIMITED MATURITY BOND SERIES (Class A Shares) Quotation of Total Return for the
Period of January 17, 1995 (date of inception) through December 31, 1996
(without deduction of the sales charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 1,130 - 1,000 = 130 130 / 1,000 = 13.0%
Year 2 1,154 - 1,130 = 24 24 / 1,130 = 2.1%
Initial Investment = $1,000.00
Ending Value Of Investment = 1,154.00
--------
Net Increase In Value = $ 154.00
Total Return - NET INCREASE = 154 = 15.4%
-------------- ---------
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES) (Class A
Shares) Quotation of Total Return for the Period of June 1, 1995, (date of
inception) through December 31, 1996 (without deduction of the sales charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 1,073 - 1,000 = 73 73 / 1,000 = 7.3%
Year 2 1,197 - 1,073 = 124 124 / 1,073 = 11.6%
Initial Investment = $1,000.00
Ending Value Of Investment = 1,197.00
--------
Net Increase In Value = $ 197.00
Total Return - NET INCREASE = 197 = 19.7%
-------------- --------
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
CORPORATE BOND SERIES (Class B Shares) Quotation of Total Return for the Period
of October 19, 1993, (date of inception) through December 31, 1996 (without
deduction of the CDSC charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 970 - 1,000 = (30) (30) / 1,000 = (3.0%)
Year 2 883 - 970 = (87) (87) / 970 = (9.0%)
Year 3 1,035 - 883 = 152 152 / 883 = 17.2%
Year 4 1,020 - 1,035 = (15) (15) / 1,035 = (1.5%)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,020.00
--------
Net Increase In Value = $ 20.00
Total Return - NET INCREASE = 20 = 2.0%
-------------- --------
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
LIMITED MATURITY BOND SERIES (Class B Shares) Quotation of Total Return for the
Period of October 19, 1993, (date of inception) through December 31, 1996
(without deduction of the CDSC charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 1,122 - 1,000 = 122 122 / 1,000 = 12.2%
Year 2 1,133 - 1,122 = 11 11 / 1,122 = 1.1%
Initial Investment = $1,000.00
Ending Value Of Investment = 1,133.00
--------
Net Increase In Value = $ 133.00
Total Return - NET INCREASE = 133 = 13.3%
-------------- --------
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
U.S. GOVERNMENT SERIES (Class B Shares) Quotation of Total Return for the Period
of October 19, 1993, (date of inception) through December 31, 1996 (without
deduction of the CDSC charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 977 - 1,000 = (23) (23) / 1,000 = (2.3%)
Year 2 904 - 977 = (73) (73) / 977 = (7.5%)
Year 3 1,094 - 904 = 190 190 / 904 = 21.0%
Year 4 1,094 - 1,094 = 0 0 / 1,094 = 0.0%
Initial Investment = $1,000.00
Ending Value Of Investment = 1,094.00
--------
Net Increase In Value = $ 94.00
Total Return - NET INCREASE = 94 = 9.4%
-------------- --------
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES) (Class B
Shares) Quotation of Total Return for the Period of October 19, 1993, (date of
inception) through December 31, 1996 (without deduction of the CDSC charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 1,069 - 1,000 = 69 69 / 1,000 = 6.9%
Year 2 1,183 - 1,069 = 114 114 / 1,069 = 10.7%
Initial Investment = $1,000.00
Ending Value Of Investment = 1,183.00
--------
Net Increase In Value = $ 183.00
Total Return - NET INCREASE = 183 = 18.3%
-------------- --------
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(WITHOUT DEDUCTION OF SALES CHARGE)
As Of December 31, 1996
Average Annual Total Return Of CORPORATE BOND SERIES (CLASS A)
1. Average Total Return For 1 Year = -0.52%
1000 (1+T) 1 = 994.77
(1+T) 1 = 0.99477
1+T = 0.99477
T = (.0052)
2. Average Total Return For 5 Years = +5.98%
1000 (1+T) 5 = 1,337.04
(1+T) 5 = 1.33704
((1+T) 5)1/5 = (1.33704)1/5
1+T = 1.0598
T = .0598
3. Average Total Return For 10 Years = +7.25%
1000 (1+T) 10 = 2,014.32
(1+T) 10 = 2.01432
((1+T) 10)1/10 = (2.01432)1/10
1+T = 1.0725
T = .0725
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(WITHOUT DEDUCTION OF SALES CHARGE)
As Of December 31, 1996
Average Annual Total Return Of U.S. GOVERNMENT SERIES (CLASS A)
1. Average Total Return For 1 Year = +1.26%
1000 (1+T) 1 = 1,012.63
(1+T) 1 = 1.01263
T = .0126
2. Average Total Return For 5 Years = +6.23%
1000 (1+T) 5 = 1,352.94
(1+T) 5 = 1.35294
((1+T) 5)1/5 = (1.35294)1/5
1+T = 1.0623
T = .0623
3. Average Total Return For 10 Years = +7.61%
1000 (1+T) 10 = 2,082.27
(1+T) 10 = (2.08227)
((1+T) 10)1/10 = (2.08227)1/10
1+T = 1.0761
T = .0761
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(WITHOUT DEDUCTION OF SALES CHARGE)
As Of December 31, 1996
Average Annual Total Return Of LIMITED MATURITY BOND SERIES (CLASS A)
1. Average Total Return For 1 Year = +2.09%
1000 (1+T) 1 = 1,020.91
(1+T) 1 = 1.0209
T = .0209
2. Average Total Return Since Inception (January 17, 1995) = +7.59%
1000 (1+T) 1.953425 = 1,153.68
(1+T) 1.953425 = 1.15368
((1+T) 1.953425)1/1.953425 = 1.0759
(1+T) = 1.0759
T = .0759
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(WITHOUT DEDUCTION OF SALES CHARGE)
As Of December 31, 1996
Average Annual Total Return Of:
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES) (CLASS A)
1. Average Total Return For 1 Year = +11.58%
1000 (1+T) 1 = 1,115.76
(1+T) 1 = 1.11576
T = .1158
2. Average Total Return Since Inception (June 1, 1995) = +12.02%
1000 (1+T) 1.5863 = 1,197.36
(1+T) 1.5863 = 1.19736
((1+T) 1.5863)1/1.5863 = 1.1202
(1+T) = 1.1202
T = .1202
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(WITHOUT DEDUCTION OF SALES CHARGE)
As Of December 31, 1996
Average Annual Total Return Of HIGH YIELD SERIES (CLASS A)
1. Average Annual Total Return Since Inception (August 5, 1996) = +5.20%
1000 (1+T) .408 = 1,052.03
(1+T) .408 = 1.05203
((1+T) .408)1/.408 = (1.05203)1/.408
(1+T) = 1.0520
T = .0520
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-CORPORATE BOND SERIES
(WITHOUT CDSC)
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 7.43
= 134.59 shares.
Ending value of initial investment at December 31, 1996, NAV price = 134.59
shares x 6.91 = $930.02.
Ending value of shares received from reinvestment of all dividends at NAV = 8.16
shares x 6.91 = $56.39.
Total ending redeemable value: 930.02
56.39
------
986.41
Total Return: 986.41 - 1,000 = (13.59)
(13.59) / 1,000 = -1.36%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 986.41
less value at beginning.............. 1,000.00
--------
(13.59)
Change (13.59)
-------
Beginning Value 1,000 = -1.36%
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-U.S. GOVERNMENT SERIES
(WITHOUT CDSC)
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 4.97
= 201.207 shares.
Ending value of initial investment at December 31, 1996, NAV price = 201.207
shares x 4.71 = $947.68.
Ending value of shares received from reinvestment of all dividends at NAV =
11.168 shares x 4.71 = $52.60.
Total ending redeemable value: 947.68
52.60
--------
1,000.28
Total Return: 1,000.28 - 1,000 = (0.28)
.28 / 1,000 = .01%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 1,000.28
less value at beginning.............. 1,000.00
--------
0.28
Change .28
-----
Beginning Value 1,000 = .01%
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-LIMITED MATURITY BOND SERIES
(WITHOUT CDSC)
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 10.67
= 93.7207 shares.
Ending value of initial investment at December 31, 1996, NAV price = 93.7207
shares x 10.14 = $950.33.
Ending value of shares received from reinvestment of all dividends at NAV =
5.9316 shares x 10.14 = $60.15.
Total ending redeemable value: 950.33
60.15
--------
1,010.48
Total Return: 1,010.48 - 1,000 = 10.48
10.48 / 1,000 = +1.05%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 1,010.48
less value at beginning.............. 1,000.00
--------
10.48
Change 10.48
-----
Beginning Value 1,000 = +1.05%
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-GLOBAL HIGH YIELD SERIES
(FORMERLY GLOBAL AGGRESSIVE BOND SERIES)
(WITHOUT CDSC)
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 10.17
= 98.32842 shares.
Ending value of initial investment at December 31, 1996, NAV price = 98.32842
shares x 10.41 = $1,023.60.
Ending value of shares received from reinvestment of all dividends at NAV =
7.98538 shares x 10.41 = $83.13.
Total ending redeemable value: 1,023.60
83.13
--------
1,106.73
Total Return: 1,106.73 - 1,000 = 106.73
106.73 / 1,000 = 10.67%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 1,106.73
less value at beginning.............. 1,000.00
--------
106.73
Change 106.73
------
Beginning Value 1,000 = 10.67%
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-HIGH YIELD SERIES
(WITHOUT CDSC)
B SHARES
1. Average Annual Total Return Since Inception (August 5, 1996) = +4.90%
1000 (1+T) .408 = 1,049.03
(1+T) .408 = 1.04903
((1+T) .408)1/.408 = (1.04903)1/.408
(1+T) = .04903
T = .0490
<TABLE> <S> <C>
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<CIK> 0000088498
<NAME> SECURITY INCOME FUND
<SERIES>
<NUMBER> 011
<NAME> CORPORATE BOND - CLASS A
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
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<INVESTMENTS-AT-COST> 75,921
<INVESTMENTS-AT-VALUE> 75,718
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<SHARES-COMMON-STOCK> 10,681
<SHARES-COMMON-PRIOR> 12,675
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (12,357)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (203)
<NET-ASSETS> 80,664
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,649
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<EXPENSES-NET> 937
<NET-INVESTMENT-INCOME> 5,712
<REALIZED-GAINS-CURRENT> (1,347)
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<ACCUMULATED-NII-PRIOR> 20
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<GROSS-EXPENSE> 950
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<TABLE> <S> <C>
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<CIK> 0000088498
<NAME> SECURITY INCOME FUND
<SERIES>
<NUMBER> 012
<NAME> CORPORATE BOND - CLASS B
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
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<SHARES-COMMON-STOCK> 1,058
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<EXPENSES-NET> 937
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<NUMBER-OF-SHARES-SOLD> 497
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<NET-CHANGE-IN-ASSETS> 1,560
<ACCUMULATED-NII-PRIOR> 20
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<GROSS-EXPENSE> 950
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<PER-SHARE-NII> .40
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000088498
<NAME> SECURITY INCOME FUND
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<NAME> U.S. GOVERNMENT - CLASS A
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
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<PAID-IN-CAPITAL-COMMON> 9,514
<SHARES-COMMON-STOCK> 1,705
<SHARES-COMMON-PRIOR> 2,026
<ACCUMULATED-NII-CURRENT> 0
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<ACCUMULATED-NET-GAINS> (978)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 162
<NET-ASSETS> 8,698
<DIVIDEND-INCOME> 0
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<OTHER-INCOME> 0
<EXPENSES-NET> 76
<NET-INVESTMENT-INCOME> 686
<REALIZED-GAINS-CURRENT> 183
<APPREC-INCREASE-CURRENT> (736)
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<NUMBER-OF-SHARES-SOLD> 409
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<SHARES-REINVESTED> 115
<NET-CHANGE-IN-ASSETS> (2,044)
<ACCUMULATED-NII-PRIOR> 3
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<GROSS-EXPENSE> 138
<AVERAGE-NET-ASSETS> 10,678
<PER-SHARE-NAV-BEGIN> 4.97
<PER-SHARE-NII> .31
<PER-SHARE-GAIN-APPREC> (.256)
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<PER-SHARE-DISTRIBUTIONS> 0
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<PER-SHARE-NAV-END> 4.71
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000088498
<NAME> SECURITY INCOME FUND
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<NUMBER> 022
<NAME> U.S. GOVERNMENT - CLASS B
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
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<SHARES-COMMON-STOCK> 140
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<ACCUMULATED-NII-CURRENT> 0
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<ACCUMULATED-GAINS-PRIOR> (1,161)
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<AVERAGE-NET-ASSETS> 10,678
<PER-SHARE-NAV-BEGIN> 4.97
<PER-SHARE-NII> .25
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000088498
<NAME> SECURITY INCOME FUND
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<NAME> LIMITED MATURITY BOND - CLASS A
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<S> <C>
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<ACCUMULATED-NET-GAINS> (70)
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<REALIZED-GAINS-CURRENT> (47)
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<ACCUMULATED-GAINS-PRIOR> (23)
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<GROSS-EXPENSE> 81
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<PER-SHARE-NAV-BEGIN> 10.66
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<PER-SHARE-GAIN-APPREC> (.507)
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<RETURNS-OF-CAPITAL> .013
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000088498
<NAME> SECURITY INCOME FUND
<SERIES>
<NUMBER> 032
<NAME> LIMITED MATURITY BOND - CLASS B
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
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<SHARES-COMMON-STOCK> 75
<SHARES-COMMON-PRIOR> 70
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (70)
<ACCUMULATED-NET-GAINS> 0
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000088498
<NAME> SECURITY INCOME FUND
<SERIES>
<NUMBER> 041
<NAME> MFR - GLOBAL HIGH YIELD - CLASS A
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000088498
<NAME> SECURITY INCOME FUND
<SERIES>
<NUMBER> 042
<NAME> MFR - GLOBAL HIGH YIELD-CLASS B
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
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<GROSS-EXPENSE> 142
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<PER-SHARE-NAV-BEGIN> 10.17
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<PER-SHARE-GAIN-APPREC> .06
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000088498
<NAME> SECURITY INCOME FUND
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<NAME> HIGH YIELD - CLASS A
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<CURRENCY> U.S. DOLLARS
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